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Full text of "Report to the Board of Supervisors : management audit of the Port of San Francisco"

GOVERNMENT IN.-'OW.'j'.nOM CENTBH 

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SAN FRANCISCO 
PUBLIC LIBRARY 




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REPORT TO THE 
SAN FRANCISCO BOARD OF SUPERVISORS 

AAANAGEMENT AUDIT 
OF THE 
PORT OF SAN FRANCISCO 



BUDGET ANALYST 
FOR THE 

SAN FRANCISCO BOARD OF SUPERVISORS 
May, 1986 





SAN FRANCISCO PUBLIC LIBRARY 



ill 



3 1223 05722 8810 



CITY AND COUNTY 




OF SAN FRANCISCO 



BOARD OF SUPERVISORS 



BUDGET ANALYST 
1182 MARKET STREET. ROOM 422 



SAN FRANCISCO, CALIFORNIA 94102 



TELEPHONE (415) 558-2641 



May 2, 1 986 



Honorable Nancy G. Walker 
Member, Board of Supervisors 
Room 235, City Hall 
San Francisco, California 94102 

Dear Supervisor Walker: 

Transmitted herewith is the Budget Analyst's management audit report of the Port of San 
Francisco. At your request, this management audit was conducted in accordance with 
Charter Section 2.40! which authorizes the Board of Supervisors to make inquiries 
concerning departmental operations. The primary purpose of this management audit was 
to determine if the Port is operating in the most efficient, effective and economical 
manner. 

As shown on pages 9 through I I of this report, the current Port management team has 
achieved many important accomplishments. For example, in the last six months, the 
Port has contracted with three new cargo lines for the purpose of using the Port's 
container cargo handling facilities. Further, the Port has California's only on-dock 
intermodal container transfer facility which provides the Port with a cost advantage over 
other west coast ports because of reduced trucking costs for railroad cargo. 

Without intending to minimize the significance of the Port's accomplishments, and 
acknowledging that the Port throughout this management audit appeared receptive to 
begin the implementation of some of our recommendations in order to improve the Port's 
operations, our management audit has identified deficiencies which we believe need the 
immediate attention of the Port. These deficiencies are as follows: 



4 46522 SFPL: ECONO JRS 
67 SFPL 04/13/01 140 



Honorable Nancy G. Walker 
Mennber, Board of Supervisors 
May 2, 1 986 
Page 2 



- The Port has some of the most valuable property on the West Coast. However, 
over the years, the Port's managers have not developed an integrated plan in 
order to use the Port's commercial property resources to finance the 
development of facilities for the maritime and fishing industries. While the Port 
has made various attempts to develop some of its property for commercial use, 
and while State regulatory agencies have hindered these attempts, the Port has 
not been as aggressive in the development of its properties for commercial uses 
as it has been in developing its properties for the shipping industry. As a result, 
at least one million square feet of Port property is either unused or 
underutilized. For example, four parcels on Piers 27/29, 70, 80 and 94/96, which 
have been vacant for over one year, contain over 434,000 square feet of office 
and industrial space. Based on a ten percent gross revenue return on estimated 
property value, the development of all Port property, currently valued at an 
estimated $1 billion, could result in an estimated $100 million in minimum annual 
revenues to the Port within twenty years, or over $70 million more than the 
Port's current annuo! rental revenues of $29.3 million. 

Since the Port does not allocate revenues and expenditures to its specific 
facilities, the Port does not know either the total costs of its specific facilities 
or whether these facilities are operating at a profit or a loss. As a result, the 
Port is not always able to operate in a businesslike manner. With the lack of this 
basic cost information, the Port is hampered in making sound decisions and does 
not know if the expenditures made at a specific Port facility are justified by the 
revenues generated by that facility. For example, the Port does not know the 
maintenance costs of either Fishermans Wharf or of Pier 94/96. 

The Port's Accounting Department has inadequate policies for the collection of 
the Port's delinquent accounts receivable owed by its tenants. The Port 
currently has delinquent accounts amounting to $3.68 million including some 
accounts that are over two years old. As of March, 1986, nine tenants owe the 
Port in excess of $1.6 million and have been in arrears for over 60 days. The 
Port has written off bad debts of over $700,000 in 1985 and over $400,000 in 
1984. As of December 31, 1985, 63.2 percent of the Port's accounts receivable 
were past due by 90 days or more. Revising Port collection policies and 
increasing tenant security deposits would increase Port revenues by at least an 
estimated $40,000 annually. 

The following list of Port tenants is an example of the Port's delinquent accounts 
receivable. Each of these nine tenants represent delinquent accounts to the Port 
in excess of $50,000 for over 60 days: 



BOARD OF SUPERVISORS 



3 1223 05722 8810 



Honorable Nancy G. Walker 
Member, Board of Supervisors 
May 2, 1986 
Page 3 

S. F. Port Delinquent Accounts Greater Than $50,000 
Overdue by 60 Days or More as of March, 1 986 



Customer 


Amount 


California Close Corp. 


$703,001 


Coastline Associates 


79,86! 


Delta Steamship Lines Inc. 


85,726 


Dispatch Transportation 


76,736 


Fritz Maritime 


124,610 


Marine Terminals Company 


52,513 


Postermat Friedman Enter. 


102,458 


Roundhouse Investors 


237,657 


Sailing Ship Dolphin P. R. 


149,21 1 


Total 


$1,611,773 



The Port is committing millions of dollars in bond funds end other funds to 
modernize cargo handling facilities in the hopes of capturing more container 
shipping business. The Port has ordered two new cranes and is acquiring one used 
crane at a cost of $6.9 million. Additionally, the Port proposes to rebuild one of 
its own cranes at a cost of $1 million even though the use of the Port's existing 
cranes is far below the industry average. In fact, to increase the Port's present 
crane usage to the industry average, the Port would have to increase the annual 
number of containers moved by 227 percent from an average of 15,303 containers 
to an average of 50,000 containers for each of its seven existing cranes which are 
now used less than five percent of their available time. Clearly, by adding three 
cranes for a total of 10 cranes, the Port's container handling capacity will far 
exceed any cargo projections well into the next decade. Therefore, the Port 
should defer the proposed $1 million rebuilding of its crane and defer an 
additional estimated $4 million for other cargo handling improvements. Tnis 
total of $5 million should be productively used for the development of several 
commercial revenue producing capital projects on Port property. 

Although the Port wharfingers conduct audits to verify wharfage statements, 
they do not review either the Port's billings and lease agreements or the shipping 
lines' and terminal operators' payment and related accounting records. As a 
result, the Port has insufficient data to determine whether it is receiving the 
correct amount of revenues which it is owed from the shipping lines and terminal 
operators. 

In lieu of awarding leases, which in some instances require the use of competitive 
bidding under the Port's procedures, the Port has chosen to award 415 licenses to 
certain tenants. While these licenses can be terminated by either the Port or the 
tenant upon 30 days written notice, in fact the Port has permitted numerous 
licenses to remain in effect for years. These licenses are presumed to have been 
renewed every 30 days if neither the Port nor its tenants take any action to 
terminate the licenses. For example, sixty current licenses have been in effect 
since 1978 or before. 



BOARD OF SUPERVISORS 



Honorable Nancy G. Walker 
Member, Board of Supervisors 
May 2, 1 986 
Page 4 

The following represents examples of tenants which have been op>erating on Port 
premises, under a 30-day license, since 1976 or before: 

Name of Tenant Year License Issued 

Granex Corp. 1969 

Pacific Bell 1969 

Spolter, McDonald & Mannion 1975 

Woods, Jack and Associates 1975 

Marine Exchange 1 975 

John Stanley Horn, Co. 1976 

Exposition Fish Grotto 1976 

Christy Truck Lines 1976 

P. J. Rhodes & Co. 1 976 

Mobil Oil Corp. 1976 

U. S. Department of Interior 1 976 

The following represents examples of tenonts operating on Port premises, under a 
30-day license, which has been awarded in the last six months: 

Western Rim Company 
Exploration Cruises 
Landor Associates 
Pacific Far East Lines 
Valley Engineers, Inc. 
Walter Allen Construction 
Southwest Marine of S. F. 
Hornblower Yachts, Inc. 
Pier 45 North Beach Star 

At least nine of the 415 tenants which have 30 day licenses pay rents to the 
Port of over $100,000 annually for space that could be vacated upon thirty days 
written notice. These tenants are as follows: 

Metropolitan Parking Corp. 
Landor Associates (two licenses) 
Hornblower Yachts (three licenses) 
Service Engineering (three licenses) 

California State Department of Corrections (four licenses) 

Fisherman's Wharf Restaurant (two licenses) 

Burger, Helen 

H & H Ship Service Co. 

Esprit Corp. 

Numerous tenants are occupying Port premises under both leases and 30-day 
licenses. As previously noted, licenses are simply rolled over forever unless the 
Port or the tenant wants the license to be terminated. Further, numerous 
tenants have been awarded more than one license. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 



Honorable Nancy G. Walker 
Member, Board of Supervisors 
May 2, 1 986 
Page 5 

The following represents examples of tenants which have both leases and 
licenses or more than one license: 

Castagnola's Restaurant 
Cresci Bros., Inc. 
Gelardi's Gift Shop 
Guardinos 

Harbor Carriers Inc. 
Harbor Tours 
Isis Imports Ltd. 
Monterey Fish 
Marine Reef 
Patio Sandwich Shops 
Polar Ice 

Sabella and Latorre 
Scoma's 

Service Engineering Co. 
Sinbod's 

Woods, Jack and Associates 

Since all of the Port's 415 licenses, in contrast to leases, are awarded by the 
Port without utilizing any competitive bidding procedures, the Port cannot be 
assured that it has maximized its revenues from these tenants. Further, these 
licenses are not subject to the approval of the Board of Supervisors even if they 
are in effect for over ten years and generate revenues to the Port of over $ I 
million. 

As a result of incomplete data contained in the Port's I 17 lease and 415 license 
files, the Port does not know if its tenants are in full compliance with all of the 
provisions of these leases and licenses. For example, in the past year, 30 
adjustments to increase rent, which were provided for under the lease and 
license agreements, were not made on a timely basis. 

Under the existing provisions of the Port's leases with some of its restaurant 
tenants, the Port is entitled to adjust these tenant rents based on amending the 
percentage of gross receipts every five years. However, the Port has not 
adjusted these leases for either of the five-year periods beginning in 1980 and in 
1985. By failing to adjust tenant rents in 1985 and in 1980, the Port has lost 
estimated revenues of at least $675,000 from their restaurant tenants. 
Increasing rents to its restaurant tenants, in accordance with the Port's lease 
provisions, would result in estimated increased revenues to the Port of at least 
$380,000 annually. 

No increase, for example, in the percentage rents was made in 1985 for the 
following four restaurants: 

Fish Alley Bar and Grill 

Franceschi's 

Pompei's 

Scoma's 



BOARD OF SUPERVISORS 



Honorable Nancy G. Walker 
Member, Board of Supervisors 
May 2, 1986 
Page 6 

Although the leases of these four restaurants, which were awarded in 1974 and 
1975, contain provisions for rent adjustments, the Port, to date, has never 
increased the rental rates payable by these restaurants. 

The Commercial Property Department has not aggressively attempted to lease 
the Port's commercial, industrial and other space. As compared to a citywide 
vacancy rate of approximately 13.4 percent for office space, the Port's vacancy 
rate for office space managed by Port staff, in contrast to the Port's office 
space managed by outside developers, is an estimated 23.6 percent. As a result 
of very limited marketing attempts to lease vacant Port facilities, we estimate 
that the Port has lost at least $298,800 in lease revenues during the past year 
for just two vacant office buildings located at Pier 27/29 and at Pier 94/96. By 
developing a sound marketing plan, we estimate that the Port could increase its 
property rental income by at least $375,828 annually. 

Currently, there are 49 boats being used as residences and 13 non-residential 
boats moored at China Basin. The Port does not have a signed lease with the 
houseboat community in China Basin. The Port is now receiving an average of 
only $12.90 per month for each boat berthed at China Basin, or a total of $9,600 
annually for all 62 boats. A market-rate lease for each of these boats would 
result in an average rent of $264 per boat per month, or a total of $196,800 
annually. Finally, the Port has never billed the tenants at China Basin for 
electricity, resulting in approximately $22,000 in annual electricity costs to the 
Port, 

The Port expends over $1 million annually to support the Fire Department's 
operation of the fireboct. However, between 1981 and 1983 the fi reboot was 
used an average of less than once per month and in 1984 and 1985 it was used an 
average of less than twice per month to fight fires on vessels or along the 
waterfront. The Port and the Fire Department are in disagreement with each 
other as to the most cost effective level of fire protection services. Given the 
level of expenditures, the importance of fire protection and the various 
alternatives currently available, a professional analysis of this situation by an 
independent expert experienced in fireboat activities at other ports is 
warranted. 

PG&E is under an order from the State Public Utilities Commission to develop a 
plan to take over the Port's electrical distribution system. A timetable for 
implementing this plan has not yet been fully developed. Provision of 
electricity by the Port results in an unnecessary burden for the Port's 
Accounting, Maintenance and Engineering Departments and increases Port 
liability for damages caused by electrical failure. Further, as of December 31, 
1985, 66.5 percent of the Port's outstanding electricity bills were past due by 90 
days or more. 



BOARD OF SUPERVISORS 



OTTTAi 



Honorable Nancy G. Walker 
Member, Board of Supervisors 
May 2, 1986 
Page 7 

In order to correct the deficiencies disclosed in this report, we recommend that the 
Port: 

Submit legislation to the Board of Supervisors to memorialize the State 
Legislation to amend the McAteer - Petris Act and the Burton Act to allow for 
the unique development potential and benefits of the San Francisco Port. The 
proposed legislation should enable the fundamental intent of these two acts to 
be applied such that the land near the Bay would be developed for water related 
uses and public access to the Bay while fully supporting the maritime and 
fishing industries. 

Develop and implement a strategic plan including the development of all of its 
commercial property to assist in the financing of facilities for the maritime and 
fishing industries. Such a plan should include the means to receive at least a 
ten percent gross revenue return on the estimated $1 billion value of Port 
property. As an initial step, the Executive Director should create a Property 
Management Division. 

Track revenues and total costs by specific facility in order to determine the 
operational and maintenance costs of each facility and in order to determine 
the revenues which will result from these expenditures. 

Send tenants a rental notice ten days before the monthly rent is due. 

Develop and install new collection procedures, citing authority for actions, and 
amending the write off policy to include downward adjustment of accounts. 

Increase tenant deposits. 

Develop a comprehensive procedures manual which addresses all collection 
issues and details the circumstances and authority under which any actions can 
be taken. 

Develop a program to improve the collection of facility damage claims in order 
to determine the proper amount due to the Port, in conjunction with the 
Wharfinger's Department. 

Defer the proposed $1 million expenditure to rebuild its own crane and defer 
approximately $4 million reallocated for other cargo handling improvements and 
instead reprogram these bond fund monies, in accordance with the original 
purposes of the bonds, for other needed Port revenue-generating capital 
improvement projects which would protect the interest of the bondholders. 

Comply with the recommendations of the City's Advisory Committee on Audits 
and Agreements by having full audits conducted of shipping lines' and terminal 
operators' payments. These audits should include both a review of the Port's 
lease agreements and billings and a review of the shipping lines' and terminal 
operators' payments to the Port and related accounting records. 



BOARD OF SUPERVISORS 



T>TTT>/-:tT*r' A -NT j» T VrcTT 



Honorable Nancy G. Walker 
Member, Board of Supervisors 
May 2, 1986 
Page 8 

Except for temporary uses, eliminate licenses for the rental of Port land and 
facilities and instead award short-term leases with a term appropriate for the 
proposed use and facility, using the guidelines recommended by the City's 
Advisory Committee on Audits and Agreements. The leases should be awarded 
on the basis of competitive bidding procedures unless the Port can clearly 
demonstrate it is not practical to do so. 

Attempt the renegotiation of leases with tenants which hold both leases and 
licenses in order to combine the leases and licenses into one lease agreement. 
If such negotiations are unsuccessful, the Port should then consider alternative 
uses for the premises occupied through a license. 

Generally limit the term of leases for conforming uses to ten years. Require 
that Port staff evaluate alternative uses of each leased facility and make 
recommendations to the Port Commission as to the future use of the facility. 

With the assistance of the City Attorney's Office, develop and amend Port 
procedures as required to permit short-term leases for non-conforming uses of 
Port lands and facilities. These leases should include recapture provisions for 
the Port and rent credits for tenant-financed improvements. A conditional use 
permit would be required from the Planning Commission for such a short term 
lease. 

Expedite the resolution of the problems with the renovation of the Ferry 
Building in order to avoid unnecessary duplicative maintenance costs and in 
order to prepare for the long-term use of the facility. 

Expedite the review and update of its 415 license files. Commercial Property 
Department staff should work with the Port's Data Processing Department staff 
to improve and use tickler files more effectively. Direct the Commercial 
Property Department staff to work with the City Attorney's Office to develop a 
license document that conforms with current law and current practices. 

Conduct the survey provided for under its lease provisions in order to obtain 
increased rents from its restaurant tenants. 

Make a major effort to lease the Port's two previously identified vacant office 
buildings and other vacant facilities and sites. 

Negotiate a market rate lease with the China Basin houseboat community as 
expeditiously as possible or consider alternative uses for the site. 
If the houseboat community remains at China Basin, the Port should end its 
electrical service to the houseboat community and require the residents of the 
houseboat community to purchase electricity directly from PG&E. We further 
recommend that Port staff review the houseboat codes used by the City of 
Sausalito and Marin County for applicability to the China Basin houseboats and 
develop a similar code to be enforced jointly by the Port and the City. Finally, 
the Commercial Property Department should be assigned the responsibility for 
maintaining complete files concerning the houseboat community. 



BOARD OF SUPERVISORS 



* Honorable Nancy G. Walker 
Member, Board of Supervisors 
May 2, 1 986 
Page 9 

We recommend that the Board of Supervisors: 

Retain an independent consultant, highly experienced in fireboat activities at 
other Ports, at a total cost of approximately $20,000, to evaluate (a) the 
efficiency and effectiveness of the existing fireboat and other fire protection 
services maintained at the Port of San Francisco and (b) various alternative 
strategies for the Port to further increase its fire protection capabilities, to 
reduce the long term cost of fire protection and to reduce the Port's overall fire 
risk. 

Finally, with respect to our finding regarding the Port's provision of electricity, we 
recommend that the Port: 

Develop with PG&E a joint program to encourage tenants to make the required 
conversions to PG&E service and to purchase power directly from PG&E. 

Develop a strategy to eliminate accounts that amount to less than $20 per 
month or that have an individual meter. 

As part of the overall capital improvements on Port property, develop and 
implement a plan for converting service to PG&E on a facility-by-facility basis 
at Port expense as appropriate. 

Eliminate the clause in renegotiation of present leases and in future rental 
agreements requiring tenants to purchase electricity from the Port instead of 
from PG&E and to continue to bill these tenants until such a conversion to 
direct PG&E service is made. 

Require the houseboat community in China Basin to pay PG&E directly for the 
electricity it receives and, until the conversion is made to direct PG&E billing, 
to charge it Port rates, including the Port's surcharge. 

Require tenants who purchase electricity from the Port to post a deposit with 
the Port similar to the deposit required by PG&E for its service. 

Throughout the course of this management audit, we received full cooperation from the 
Executive Director of the Port and his staff as well from the staffs of other City 
Departments. 

The Executive Director of the Port has had an opportunity to review and comment on 
this report. His written response, consisting of 22 pages, is attached to our report 
beginning on page 77. Although he states that our report "... contains many useful 
recommendations", in general, the response of the Executive Director is sharply critical 
of our report, referring to it as "disappointing", "misleading" and "deficient". He states 
that our report "... contains numerous self-contradictions and errors of fact ..." and 
reflects "... a serious lack of understanding of the legal, political, and economic 
environments in which the Port must operate." 

Although the Port states that our report contains errors, the Port's statements ore not 
based on an examination of our detailed working papers which contain the evidence 
supporting the facts in our report. 



BOARD OF SUPERVISORS 



T>r TTN^ Tjnr A IVT A T VCT" 



Honorable Nancy G. Walker 
Member, Board of Supervisors 
May 2, 1986 
Page 10 

The Port's respor^se states that the most significant "inadequacies" in our report are as 
follows: 

Vacancy rate is miscalculated — The Port's response states that we erroneously 
calculated a vacancy rate of 23.6 percent. However, the Port's response has included as 
leased properties the Ferry Building offices of Port staff, the land under the control of 
the San Francisco Redevelopment Agency and the office space built and occupied by 
Harbor Carriers under a development agreement with the Port. Through these inclusions, 
the Port has calculated a 15 percent vacancy rate for "total leasable office space." By 
including these properties, the Port has understated its actual vacancy rate which we 
have correctly calculated to be 23.6 percent for those properties directly under the 
responsibility of the Port's property management function. 

Commercial value of Port property is not understood — The Port's response states that 
the value of Port properties of $1.0 billion used by the Budget Analyst is an 
"unsubstantiated valuation." As stated in our report, the $1.0 billion was refxjrted in a 
1985 report by the Chief Administrative Officer. 

Cost estimates are inconsistent — The Port's response states that our cost estimates are 
inconsistent because in our summation of total costs, we do not include the $20 million 
annual cost to correct the Port's deferred maintenance problems. We include neither this 
$20 million annual cost nor the additional annual revenues which the Port would receive 
from the development of Port properties over the next decade. 

Renegotiation of long-term leases is unlikely — The Port's response states that it is 
unrealistic to expect that restaurants in the Fishermans Wharf area would be willing to 
renegotiate their long-term leases on terms more favorable to the Port in order to 
protect the smaller parcels of adjacent property now held by the restaurants through 
month-to-month licenses. These licenses can be terminated by the Port upon 30 days 
written notice. We have addressed this issue on pages 44 through 46 of our report 
recommending that, if the tenants are not willing to renegotiate their leases, then the 
Port should consider alternate uses for those Port parcels awarded on the basis of 30-day 
licenses. 

In general, the Port's response provided information on the Port's past accomplishments 
and its current plans. However, in our judgment, the Port has not adequately responded 
to the major problems identified in our report. As one example, we reported that the 
Port does not know the total operating and maintenance costs of its specific facilities. 
The Executive Director's response to this finding was "... direct expense information by 
facility is currently available." (emphasis added) However, the Executive Director does 
not speak to the issue of total cost data. We submit that the Port cannot provide total 
cost data by specific facility if requested to do so at this time because it has never made 
such calculations. We believe that having such basic total cost information readily 
available is essential if the Port is to operate in a sound, businesslike manner. 

Another example of the Port's inadequate response relates to our finding on the Port's 
bad debts. The Port dismisses this finding by stating, "The $700,000 written off in 1985 
was 2.4% of total operating revenues; the $400,000 in 1984 was 1.4%. The Accounts 
Receivable Write-off Policy was approved by the Port Commission and has been in effect 
since July 1984. Of the 63.2% receivables 90 days past due, accounts representing 47.5% 
have been forwarded to the City Attorney and are in litigation. Only 15% are the 
responsibility of the collections section." 



BOARD OF SUPERVISORS 



BUDGET ANALYST 



Honorable Nancy G. Walker 
Member, Board of Supervisors 
' May 2, 1 986 
Page I I 

With the respect to our recommendation that Port leases should be awarded on the basis 
of competitive bidding procedures unless the Port can clearly demonstrate it is not 
practical to do so, the Port responded, "In today's marketplace, comf^etitive bidding is a 
pointless and excessively time-consuming exercise." 

Finally, the Executive Director states that we are not "... familiar with the maritime 
industry..." and we do "... not have a firm grasp of the realities of managing Port lands." 
We acknowledge that we are not maritime experts. We have never held ourselves out to 
be experts in Port operations. However, we do consider ourselves to be experts in 
obtaining the facts. 

Our report is based on the facts. Complete working papers and other documentation 
supporting the findings, conclusions and recommendations contained in this report are 
available in the Office of the Budget Analyst for the review of all interested persons. 

In addition to strengthening the overall efficiency and effectiveness of the Port's 
management and operations, the proper implementation of the recommendations 
contained in this report would result in a combination of conservatively estimated 
increased revenues and reduced expenditures of at least $1,004,828 annually. 
Implementation of these recommendations would require an estimated annual 
expenditure of $50,000 and an estimated one-time expenditure of $51,319. Further, 
aggressive development of the Port's unused and underutilized property could result in 
additional estimated increased revenues of $70 million annually within twenty years. 

Respectfully submitted, 

Harvey M. Rose 
Budget Analyst 

Staff: Dwight Steeves, Project Manager Kate Harrison 

Bill Courtright Debra Newman 

Tom Dorn Merlin Zimmerly 

cc: President Molinari 

Supervisor Britt 
Supervisor Hongisto 
Supervisor Kennedy 
Supervisor Kopp 
Supervisor Maher 
Supervisor Nelder 
Supervisor Renne 
Supervisor Silver 
Supervisor Ward 
Clerk of the Board 
Mayor Feinstein 

Roger Boas, Chief Administrative Officer 

Eugene Cortland, Executive Director, Port of San Francisco 

Edward Phipps, Deputy Chief, Fire Department 

John Farrell, Controller 

Farnum Alston, Executive Deputy for Program and Fiscal Administration 
Mark Kertz, Deputy City Attorney 

BOARD op SUPERVISORS 



BUDGET ANALYST 



TABLE OF CONTENTS 

Page 

Introduction I 

History and Orgonizotion of the Port 3 

The Current Port Managers Have Achieved Important Accomplishments 9 

Section I: Finance and Administration 

Section I.I: Strategic Planning 13 

Section 1.2: Facility Accounting 20 

Section 1.3: Collection Procedures 23 

Section II: Maritime Issues 

Section II. I: Capital Project Planning 3! 

Section 11.2: Audits of Shipping Lines and Terminal Operators 37 

Section III: Commercial Property 

Section III. I: Duration of Leases Versus Licenses 40 

Section III.2: Compliance with Leases and Licenses 47 

Section III. 3: Lease Adjustments for Restaurant Tenants 50 

Section IN.4: Leasing of Port Facilities 54 

Section IV: Other Issues 

Section IV. I: China Basin Houseboat Community 59 

Section IV.2: Fireboat 63 

Section IV.3: Provision of Electricity 68 

Glossary 73 

Appendix 77 

Written Response of Executive Director &i 

Written Response of the Fire Department 107 



INTRODUCTION 



At the direction of the San Francisco Board of Supervisors, the Budget Analyst has 
conducted a managennent audit of the Port of San Francisco. The primary purpose of this 
management audit was to review the operating practices of the Port in order to 
determine if the Port is operating in the most efficient, effective and economical 
manner. In conducting this management audit, the Budget Analyst was mindful of the 
1984 bond issue to improve the Port of San Francisco's container handling and other 
facilities, the problems encountered in renovating the Ferry Building complex, the 
preliminary plans to build a hotel on Fisherman's Wharf's Pier 45 which would generate 
funds to improve fishing facilities on the Hyde Street Pier, overall facility maintenance 
concerns and the plans to rehabilitate Piers \f \h and Pier 3 for commercial office use. 

Our discussion of Port activities requires the use of several terms which may not be 
familiar. We do not define these terms in the body of the report but in the glossary on 
page 69. Our use of the word shipping may be particularly confusing. We use it to mean 
"having to do with ships in port," not its other common meaning — "having to do with the 
general transportation of goods." However, a shipper is a shipping agent or someone who 
consigns or receives goods for transportation or is anyone involved with the movement of 
cargo. We define the word maritime to mean all activities that are directly related to 
the sea such as shipping, ship repairing, fishing, and passenger liner, tugboat and pilot 
services, etc. 

Audit Procedures 

The approach to this management audit consisted of conducting extensive 
interviews with Port employees, as well as employees of the departments of Public 
Works, Fire, Real Estate, City Attorney and Controller. We reviewed the State and City 
laws. City Charter provisions, and Port and City policies and procedures guiding the 
creation and operation of the Port. We collected data and analyzed records relevant to 
the day-to-day operations of the Port. In addition, we conducted interviews with 
employees of the ports of Oakland, Tacoma, Redwood City, Seattle, Long Beach, and Los 
Angeles, the Fishermans Wharf Merchants Association and with various firms that use 
Port facilities. 

We concentrated our audit procedures in those areas of the Port's management 
which we believed had the best potential for developing recommendations which, if 
implemented, would result in improved Port operations. Although we examined portions 
of the Engineering and Maintenance Departments, our audit efforts were concentrated in 
other areas. With respect to maintenance facilities, our audit pointed out that the Port 
does not know the maintenance costs of its specific facilities. We did not evaluate the 
Port's Personnel Department since this area should be examined in connection with a 
management audit of the City's Civil Service Department. 

Genaral Findings 

As we state on page nine, the current Port management team has had important 
accomplishments. Without intending to minimize the significance of these 
accomplishments, our report identifies the actions required to improve the overall 
managerhent of the Port and to take full advantage of the inherent value of the Port's 
real estate holdings. The Port is essentially a landlord leasing to its tenants facilities 
and space on land and water. We did not find the Port, as a landlord, to act either as an 
enterprising property management, development and marketing agency or as a simple 



BOARD OF SUPERVISORS 



BUDCtr ANALYSI 



caretaker of the State's lands which it holds in trust. However, we found the Port to be 
towards the latter of the two extremes. 

In the sections of this report that follow, we reconnmend improvements in the 
following areas: Port strategic planning, facility accounting, use of the Port's computer, 
collection and deposit policies, capital project planning, audits of shipping contracts, 
duration, compliance and adjustments of Port leases and licenses, the leasing of Port 
facilities, the China Basin houseboat community, fireboat services and the provision of 
electricity to Port tenants. 

Implementation of our recommendations would result in conservatively estimated 
savings or revenue enhancements to the Port of at least $1,004,828 annually. 
Additionally, the development of certain Port property, which is presently unused or 
underutilized, could result in increased revenues to the Port of an estimated $70 million 
annually within twenty years. Additional annual income in an amount which cannot be 
fairly estimated should also result from the implementation of our recommendations. 
However, even more important than the increased revenues which would accrue to the 
Port from the proper implementation of our recommendations are the improvements 
which would result to the Port's operating practices. The estimated cost to implement 
the recommendations contained in this report is $50,000 annually plus $51,319 in one- 
time costs. 

Throughout the course of this management audit, we received the full cooperation 
of the Executive Director of the Port and all of his staff as well as the staffs of other 
City departments. They consistently demonstrated a willingness to consider new ideas 
and alternatives to existing methods of operation. Without their assistance our work for 
the Board of Supervisors would have been much more difficult. 



BOARD OF SUPE RVISORS 
BUDGE I ANALYST 



HISTORY AND ORGANIZATION OF THE PORT 



While San Francisco Bay is generally very shallow around its perimeter, requiring 
expensive dredging in order to accommodate oceangoing ships, San Francisco's Port is a 
naturally sheltered, deep water harbor which was important to the development of the 
western United States. The Gold Rush of \8h9 stimulated the development of piers, 
warehouses and related fishing, commerce and ship servicing facilities throughout the 
City's northern waterfront. The Port emerged as the dominant West Coast Port during 
the early twentieth century, and numerous additional finger piers were developed as 
trade increased. The Port proved valuable during World War II as a major Pacific Coast 
transfer and consolidation point for personnel and material shipped to the war in the 
Pacific. 

After the Korean War, the dominance of the Port decreased as other West Coast 
ports increased their share of the shipping market. In fiscal year 1 984-85, for example, 
the Port handled only 2.7 million metric tons of shipping or approximately fifteen 
percent of the total handled by all Bay Area ports. This decline in the San Francisco 
Port's market share occurred as, during the I960's, the character of shipping changed 
with the introduction of containers to replace most "breakbulk" cargo. Because the Port 
was slow to realize the impact of containerization, it did not then attempt to introduce 
the equipment required to handle containers efficiently. Instead, it attempted to serve 
another new shipping technology called Lighters Aboard Ship (LASH). LASH methods 
were not successful and have been abandoned by the shipping industry. In the late 1970s, 
the Port began to attract containerized shipping by using its LASH facilities to transfer 
containerized cargo. Presently, the Port has facilities to handle containerized cargoes at 
Piers 80 and 94/96. The Port is continuing to develop additional facilities to handle 
containerized cargo. 

The City of San Francisco acquired jurisdiction over the Port's property and 
operations in 1969. The California Legislature originally established the Board of Harbor 
Commissioners to develop port facilities and oversee the use of Bay-front property in 
1863. From 1863 until early 1969, the State of California had jurisdiction over the Port 
of San Francisco. In 1968, the State Legislature approved the Burton Act (Statutes 1968, 
Chapter 1333) transferring jurisdiction over Port land from the State to the City. The 
voters of San Francisco approved this transfer in November, 1968 and the Port 
Commission of San Francisco was established in February, 1969, when the City and State 
jointly approved the Transfer Agreement. The City holds the Port lands in trust for the 
State; the State could reclaim title to the Port lands at any time for any reason. 
However, there is no indication at this time that the State wishes to reclaim the Port 
property. 



BOARD OF SUPERVISORS 



BULXitI ANALYSI 
-3- 



Port Property 



The lands given to the City in trust by the State and the lands that are privately 
held but under Port jurisdiction (such as Pacific Gas and Electric (PG&E) property 
located in the southern waterfront area) total more than one thousand acres. These lands 
occupy approximately 7.5 miles of shoreline from the Hyde Street Pier in the North to 
India Basin in the South. The trust agreement with the State permits Port property to be 
used for navigation, commerce, fishing, open space and park purposes. 

The Port's lands are divided into six planning zones through plans developed by the 
City and the Bay Conservation and Development Commission (BCDC). These plans for 
the six zones govern their long term use. The plans generally discourage or confine non- 
maritime use to facilities that are declared surplus to commerce, navigation or fishing 
use. These land-use plans can be amended through City Planning Department 
procedures. The six zones are described below: 

The Fisher mans Wharf Zone (Hyde Street Pier to Pier 39) combines commercial 
fishing uses with tourist-oriented shops, restaurants, sightseeing ferryboat and helicopter 
tours, entertainment and a marina. The commercial restaurants and shops in this area 
are among the highest revenue producers for the Port. While not generating a significant 
amount of revenue to the Port, fishing activities, which include the retail and wholesale 
marketing of fish, and refueling and ice facilities, are the most active in the San 
Francisco Bay. The Wharf area has many long-term tenants and a waiting list to rent the 
fishing facilities. 

The Maritime Reserve Zone (Pier 9 to Pier 35) supports a variety of maritime and 
fishing facilities such as a passenger terminal for cruise lines, seasonal fishing support 
and service facilities and warehouses, piers, a Foreign Trade Zone, newsprint import and 
storage, servicing facilities, and tugboat and water taxi berths. The inland seawall lots 
support offices, restaurants, retail shops and parking are not designated maritime 
reserve. 

The Urban Waterfront Zone (Pier 7 to Pier 24), includes office, retail, and other 
commercial and recreational uses. This zone contains the Ferry Building, the 
Agricultural Building, piers and former ferryboats converted for office and commercial 
uses. There are plans to rehabilitate and refurbish these Port facilities and a new public 
access promenade has already replaced a series of dilapidated piers. The planned 
rehabilitation of other Port property in this zone is pending. 

The Ship Repair Zone (Pier 26 to Pier 38) has facilities for the repair of ships for 
the U.S. Navy and private shipping firms. Most of the repair work is done for the Navy. 
The repairs range from hull and engine work to the installation and repair of modern 
electronic equipment manufactured by firms in the Bay Area. Ship repair is a steady, 
ongoing business for the Port. 

The South Beach Seawall Lots (Pier 40 to Pier 46) are to be developed into 
residential, commercial, marina, park and other recreational uses by the San Francisco 
Redevelopment Agency. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 
-4- 



The Southern Waterfront (Pier 48 to Pier 96) is dedicated to a variety of shipping 
and other maritinne uses including loading and unloading of containers, break, liquid and 
dry bulk cargo and ship repair. The major development planned for this area is the 
construction of an intermodal container transfer facility (ICTF), which will increase the 
Port's efficiency of moving shipping containers from ships to trains. In addition, the silt 
buildup and subsided mud around certain piers will be dredged so that the new deep draft 
container ships can be accommodated. 

Organization of the Port 

The Port Commission operates the Port as a City department under the City 
Charter (Sections 3.500, 3.580 - 3.585 and 7.305), the Administrative Code and other City 
codes, Tariff 3C of the Port of San Francisco and the laws of the State of California and 
the United States. The five Commission members are appointed by the Mayor subject to 
the confirmation of the Board of Supervisors. Members serve overlapping four year 
terms and may be reappointed. The Port Commission is resp>onsible for developing 
policies for the Port but the Board of SuF>ervisors must approve the Port's budget, any 
supplemental appropriations and certain Port leases. The Mayor appoints the Port 
Director who reports to the Port Commission. 

Port staff is responsible for carrying out the policies of the Port Commission in its 
day-to-day operations. The staff works with other City departments (Real Estate, 
Controller, Civil Service, Fire, Police, etc.); shipping, railroad and trucking firms; 
foreign governments, developers, governmental regulatory bodies, and many others to 
develop and maintain Port lands. The Port has an approved 1985-86 budget of 
$32,465,868, including the cost of the fireboat activities. The Port has 229 funded 
positions that are assigned to three Port divisions: Finance and Administration, Maritime 
Affairs, and Engineering and Maintenance. Note that the Port has not assigned its 
responsibilities for fishing, navigation, or commerce to any of its organizational 
entities. Descriptions of the functions of these three divisions follow. The Port's current 
organization is depicted on page 7. 

Finance and Administration 

The Finance and Administration Division is comprised of four departments: 
Commercial Property, Accounting, Personnel, and Data Processing. The Commercial 
Property Department manages the rental of Port property. This Department generates 
most of the Port's revenue ($19,336,000 or 66.4 percent in FY 1984-85 including 
$4,878,000 from maritime property rentals and $14,458,000 from commercial prop>erty 
rentals) through the 532 leases and licenses for commercial property, and its many 
parking agreements. The Commercial Property Department has made a great many 
improvements in its management of leases, licenses and parking agreements in the last 
few years. The Accounting Department is responsible for the Port's centralized 
purchasing system, for collections, disbursements and recordkeeping of all Port financial 
transactions, and for coordinating and putting together the Port's annual budget 
document and accounting procedures. The Personnel Department manages the employ- 
ment recordkeeping of Port employees. The Data Processing Defxirtment processes 
financial and property data for all Port departments. This Department is also responsible 
for providing statistical analysis and reporting, especially for the Maritime Affairs 
Division, and processes the Port's payroll. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 
-5- 



Maritime Affairs 



The Maritime Affairs Division is organized into five depKirtments: Public 
Relations, Sales, Marketing, intermodal and Wharfinger. The Sales and Marketing 
Defxirtments negotiate with shipping firms, shipfjers, governments and manufacturers for 
the use of Port shipping facilities. The Intermodal Department coordinates ship, truck, 
and rail traffic through the Port. It maintains a smooth flow of operations at the various 
piers as ships are loaded and unloaded. The Wharfinger's Department works with 
maritime shipping firms and shippers to insure that billings are accurate. The Maritime 
Affairs Division is currently making improvements, developing facilities such as an 
intermodal container transfer facility, demolishing sheds and providing better lighting 
and better access to all of the Port's container facilities. 

Engineering and Maintenance 

Two departments comprise the Engineering and Maintenance Division: 
Maintenance and Engineering. The Maintenance Department operates, maintains and 
repairs the Port's facilities, structures and utilities. The Engineering Department is 
responsible for engineering, architecture and inspection services and serves as a liaison 
with private tugboat and dredge services. 

Budget 

The Port is a self-sustaining operation. The Port operates at on overall surplus 
mainly through the revenues generated by the Commercial Property Department of the 
Finance and Administration Division. The Port generates all of its own operating monies 
and does not receive any General Fund monies from the City. Port funds are restricted 
to be used for Port purposes under the Burton Act. At this time, any grant monies 
received by the Port are for specific projects. A summary of the Port's budget for 1 985- 
86 is provided on page 8. 



BOARD OF SUPERVISOf^ 
BUDGET ANALYST 

-6- 



PORT OF SAN FRANCISCO 

CURRENT ORGANIZATION 



(Port Commissioners^ 



Port Director 



Engineering & 
Maintenance 



1 



c 



Engineering 



Maintenance 



Enginering 



-foperat 



Architecture J Utilities ^ 



Inspection 



Tugs and 
Dredges 



ions 



Structures 



Maritime Affairs 



Finance & Administration 



Public 
Relations 



Commercial 
Property 

Accounting 



Data 
Processing 



Personnel 



Marketing"^ ^ Sales ^ ^ IntermodaT^ ^ Wharfinger^ 



-7- 



Port Budget 1985-86 



Revenues 

Category Estimated Port Revenues 

Wharfage, Dockage, Demurrage $ 7,234,000 

Ship Repair 2,720,000 

Cargo Facility 644,000 

Crane Rental 929,000 

Facility Damages 108,000 

Rental of Property 1 3,870,000 

Parking Sp>aces and Meters 1 ,425,000 

Miscellaneous Services to Tenants 150,000 

Commercial Power Sales 960,000 

Miscellaneous Port Revenues 547,000 

Interest Earnings 3,812,868 

Penalties and Service Changes 66,000 

Total $32,465,868 

ExF>enditures 

Function Approved Funds Employees 

Maritime $ 1,484,756 17 

Commercial 3,297,707 9 

Maintenance 8,241,788 125 

Engineering 1,893,897 32 

Admin./Finance 16,299,921 46 

Subtotal $31,218,069 229 

Facilities Maintenance, 

Hazardous Waste Clean Up 200,000 

Subtotal $31,418,069 

Fireboat Operations 1,169,769 

Total $32,587,838 

Estimated Addition to Port Surplus 

Revenues $32,465,868 

Expenditures 32,587,838 
Estimated Use of Surplus 

for 1985-86 $ 121,970 



BOARD OF SUPERVISORS 



BUDGET ANALYST 



T>E CURRENT PORT MANAGERS HAVE ACHIEVED 



IMPORTANT ACCOMPLISHMENTS 



The present Executive Director of the Port has served as a Port Commissioner 
from 1979 until his appointment as Executive Director in 1983. As Executive Director, 
he has been responsible for new staff being hired in key positions with positive results in 
all of the Port's divisions. 

Financiol 

In fiscal year 1982-83, the Port had operating revenues of $26,360,000 and 
operating expenses of $19,967,000 for a net operating surplus of $6,393,000. These 
results were improved in fiscal year 1983-84 to $27,621,000, $18,525,000 and $9,096,000 
respectively for a net increase in operating surplus of $2,703,000 or A2.3 percent. In 
fiscal year 1984-85, operating revenues increased to $29,121,000 while operating 
expenses also increased to $23,653,000 for an operating surplus of $5,468,000. This 
decrease in operating income of $3,628,000 or 39.9 percent can be attributed to an 
increase of $4,722,000 in operations and maintenance expense from fiscal year 1 983-84. 
For fiscal year 1985-86, the Port expects to improve net revenue because of increases in 
revenues from both commercial property rentals and containerized shipping which moves 
through the Port. 

Finmce and Administration Division 

The Commercial Property Depxirtment staff has just completed a review of the 
Port's I 17 leases and is now reviewing the 415 licenses awarded by the Port. The lease 
review discovered deficiencies in general recordkeeping, timelines of actions and the 
need for new methods to improve the operation of the Department, especially the need 
to use the Port's computer more effectively. The staff has developed a data entry form 
for the Port's computer for leases and licenses that will improve the overall 
recordkeeping and accuracy of the Department's files. 

During the two year period from April, 1 984 through March, 1 986, the Commercial 
Property Department has accomplished the following: 

Negotiated and processed 266 new rental agreements, almost all licenses; 
Booked and coordinated 37 special events at Pier 35 and 45; 
Issued and monitored 42 filming permits; 

Increased annual billings by more than $750,000 through lease rental rate 
adjustments; 

Increased annual billings on existing licenses by more than $635,000 

through scheduled rate adjustments; 

Increased rates for parking stalls by 15 to 35 percent; 

Developed and implemented a plan for installing 300 new parking meters; 

Assisted in collecting several hundred thousand dollars in delinquent 

accounts; 

Audited 1 17 leases and corrected their compliance deficiencies including 
the collection of over $175,000 in back rent payments; 
• Corrected many squatter/encroachment problems by evicting the 
squatters or by securing payment for the space; and 
Formalized policies and procedures for various Department activities. 



BOARD OF SUPERVISOF^ 



BUDCtr ANALYST 



-9- 



The Accounting Departnnent has made good progress by developing 
new procedures to perform the Department's tasks and using the Port's 
computer system to improve the quality of the recordkeeping. These 
accomplishments include: 

Developed a new collection policy, which, in Section 1.3, we recommend should 
be improved further; 

Improved collections over last three years through March, 1986; 
Modified the computer system to automatically produce delinquent letters; 
Begun successful use of the Small Claims Court for the collection of 

receivables previously thought to be not cost effective to pursue; 
Developed new and improved management information reports regarding 

collections that provide for more effective managing of receivables; 
Began to use improved collection methods, such as shutting off a tenant's 

electrical power for non-payment after required notice; 
Improved record keeping, including a file, log and extensive 

documentation on all past due accounts; and 
Developed a new Port budget document and new management reports. 

The Data Processing Department is developing new programs for Port staff and 
maintains computerized records for all Port departments. The Department has proposed 
a three year plan to be evaluated by staff from the City's Electronic Information 
Processing Steering Committee (EIPSC) for the use and development of the Port's 
computer systems. This proposal is currently being evaluated by EIPSC. The 
Department has also developed documentation for its computer programs, eliminating 
the need for consultants to service the Port's computer program. 

Maritime Affairs Division 

Currently there are 27 shipping lines using the Port's cargo facilities and 14 
passenger lines using the Port's passenger terminal. In the last six months the Port has 
contracted with three new cargo lines (Japan Line, Zim Container Service and Island 
Shipping Line) for the purpose of using the Port's container cargo handling facilities. San 
Francisco has California's only on-dock intermodal container transfer facility which 
provides the Port with a cost advantage over other west coast ports because of reduced 
trucking costs for railroad cargo. 

The Port has developed and implemented a competitive pricing strategy that has 
resulted in increased cargo and new lines for the Port. The Port has actively worked 
with the ship repair industry and has successfully coordinated efforts to attract more 
ship repair business to Port facilities. Further, the Port has implemented new procedures 
to upgrade facilities at Fisherman's Wharf and regularly meets with the fishermen to 
coordinate Port and Fisherman's Wharf needs. 

The overall cargo handled at the Port was 1,320,000 metric tons in fiscal year 
1982-83 and 1,901,000 metric tons in fiscal year 1983-84 and 2,735,000 metric tons in 
1984-85. The number of passenger ships calling at the Port increased from 59 in fiscal 
year 1982-83 to 71 in fiscal year 1983-84 to 121 in fiscal year 1984-85. The number of 
passengers who used the Pier 35 facilities totalled 92,753 in fiscal year 1984-85 as 
compared to 83,561 in 1983-84, or an II percent increase. 



BOARD OF SUPERVISORS 
BUDCer ANALYST 
-10- 



Engineering and Maintenonce Division 



The Engineering Department has provided the technical expertise for the following 
projects; intermodal Container Transfer Facility (ICTF), Pier 80 and Pier 94/96 
improvements, new container handling cranes for Pier 80, preliminary work for the 
rebuilding of Pier 30/32, design work for the fishing Pier (Pier 7) and handicap access at 
the wharfs on Fishermans Wharf. The Port now hires outside firms to do its dredging 
because it is more cost effective than accomplishing this work on in-house basis. 

The Maintenance Department has improved its custodial services at Fishermans 
Wharf and has continued to maintain the Port's facilities. The Department is now using a 
personal computer for budget analysis. 

Facility Management 

The Port has completed a number of facility improvement projects and has a 
number of other projects in varying stages of completion. Projects completed include 
the Roundhouse Building which is the former Belt Railroad Roundhouse. This complex is 
now a 42,000 square foot facility for office and retail uses; the temporary ICTF - 
completed in the fall of 1984 to provide on dock transfer of cargo containers between 
railcars and ships at Pier 94/96; major improvements for handling container cargoes at 
Piers 80 and 94/96; the rebuilding of the Jefferson Street Seawall at Fishermans Wharf; 
and the installation of a new container handling crane on Pier 80. 

Projects now in progress include the building of a breakwater at Fishermans Wharf 
to protect boats and facilities, Phase I construction of the permanent ICTF on Pier 
94/96, improvements to Piers 80 and 94/96 to improve container handling, design of the 
Pier 7 public fishing facility and the development of Piers Ife, 3 and 5 to provide new 
office space. 

The Port has had major accomplishments for the past two years in its various 
programs. These improvements have made the Port a more fiscally sound operation. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 
-I I- 



SECTION I 
FINANCE AND ADMINISTRATION 



BOARD OF SUPERVISORS 
BUDGET ANALYST 
-12- 



' SECTION LI: STRATEGIC PLANNING 

THE PORT HAS SOME OF THE MOST VALUABLE 
PROPERTY ON THE WEST COAST. HOWEVER, OVER THE 
YEARS, THE PORPS MANAGERS HAVE NOT DEVELOPED 
AN INTEGRATED PLAN IN ORDER TO USE THE PORT'S 
COMMERCIAL PROPERTY RESOURCES TO FINANCE 
THE DEVELOPMENT OF FACILITIES FOR THE MARITIAAE 
AND FISHING INDUSTRIES. WHILE THE PORT HAS MADE 
VARIOUS ATTEMPTS TO DEVELOP SOME OF ITS 
PROPERTY FOR COMMERCIAL USE, AND WHILE STATE 
REGULATORY AGENCIES HAVE HINDERED THESE 
ATTEMPTS, THE PORT HAS NOT BEEN AS AGGRESSIVE 
IN THE DEVELOPMENT OF ITS PROPERTIES FOR 
COMAAERCIAL USES AT IT HAS BEEN IN DEVELOPING ITS 
PROPERTIES FOR THE SHIPPING INDUSTRY. AS A 
RESULT, AT LEAST ONE MILLION SQUARE FEET OF 
PORT PROPERTY IS EITHER UNUSED OR 
UNDERUTILIZED. FOR EXAMPLE, FOUR PARCELS ON 
PIERS 27/29, 70, 80 AND 94/96, WHICH HAVE BEEN 
VACANT FOR OVER ONE YEAR, CONTAIN OVER 434,000 
SQUARE FEET OF OFFICE AND INDUSTRIAL SPACE. 
BASED ON A TEN PERCENT GROSS REVENUE RETURN 
ON ESTIMATED PROPERTY VALUE, THE DEVELOPMENT 
OF ALL PORT PROPERTY, CURRENTLY VALUED AT AN 
ESTIMATED $1 BILLION, COULD RESULT IN AN 
ESTIMATED $100 MILLION IN MINIMUM ANNUAL 
REVENUES TO THE PORT WITHIN TWENTY YEARS, OR 
OVER $70 MILLION MORE THAN THE PORT'S CURRENT 
ANNUAL RENTAL REVENUES OF $29.3 MILLION. 

The recent development of the Port's Intermodal Container Transfer Facility 
(ICTF) has been a significant achievement. When first begun, the ICTF and Pier 80 
modernization projects had immense problems to overcome. Large scale development 
and financial plans were made, Revenue Bonds for $42.5 million were approved and 
marketed, complex engineering work was done within tight schedules, contracts with 
shipping lines were entered into for use of the new facilities, and railroad access was 
designed and negotiated under very difficult and unusual circumstances. All this was 
done in little more than a year. Further plans for additional maritime development are 
underway which could require an additional expenditure of $50 million. 

However, the Port has not pursued the commercial development of its properties 
with the same enthusiasm with which it develops properties for maritime purposes. 
Often, commercial development at the Port falters when a difficulty is encountered. 
This limited enthusiasm to develop its commercial properties is unfortunate because the 
Port needs revenues from commercial development to finance further maritime 
improvements. 

The Port has a Maritime Strategy, last revised in 1979, which provides that "...Port 
development should maintain a proper balance of maritime, non-maritime, and pnjblic 
uses, and that revenues generated from commercial/recreational and office uses b>e 
dedicated to the support of growth and modernization of the Port's southern 
waterfront." Not only is the Port unable to finance a plan for balanced development, the 
Port is unable to fund $200 million of deferred maintenance and repair required to 
restore its piers to good condition. 



BOARD OF SUPERVISORS 



BUDCbl ANALYSI 
-13- 



In other words, the Port has invested the current limit of its financial resources 
'into maritime development while its other facilities are deteriorating. In addition, the 
investment into maritime development is not without risk. If the forecasted increased 
cargoes of the Port's shipping lines do not materialize or if the business of the shipping 
lines with which the Port contracts otherwise declines, these shipping lines could be 
forced to abandon their obligations to the Port. The Port's risk is summarized by the 
following: 

The economics of modern ocean shipping favor large specialized, vessels, but 
to operate profitably these vessels must keep the amount of time spent in 
port to a minimum. Ports noted for rapid turn-around-time are, therefore, 
very attractive to modern shippers, and as a result, the competitive pressure 
on U.S. seaports has been to develop large, special purpose cargo handling 
facilities. This competition has resulted in some over-capitalization as 
seaports that win competitive battles increase their cargo handling 
capacities to take advantage of economies of scale while those that lose find 
themselves with idle capacity that cannot be transferred to high traffic 
areas. Some over capacity may be useful at active ports to handle peak load 
requirements, but when the comf^etitive battles are over, facilities at many 
smaller U.S. ports will remain underutilized even during peak load periods.* 

A tour of the Port's real estate provides evidence that some of the Port's maritime 
development of prior years is not utilized and has deteriorated, resulting from the over 
development of prior administrations. The current administration's enthusiasm for quick 
and aggressive maritime development may be taking advantage of immediate market 
opportunities and competitive pressures, but it also raises questions about the Port's 
present capability to finance needed maintenance of its facilities and its long-term 
ability to continue to finance ongoing service to the maritime industry. 

The Port's properties are valuable. Its facilities are estimated to be worth more 
than one billion dollars.** On the West Coast, only oil producing land may be more 
valuable than the Port's properties. Other sections of this report show that the Port does 
not develop its valuable properties and manage them in an attentive and aggressive 
manner. We discuss specific causes and solutions for these deficiencies within the 
individual sections. However, there is a more universal cause for these difficulties. As 
the manager of 799 acres of very valuable property, the Port does not have a clear long 
term strategy for the development and management of its real estate holdings. 

The Port's managers have focused attention on the development of the Port to 
serve the maritime shipping industry. Concurrently, the Port's managers have restricted 
the development of the Port for other commercial uses because their attention has been 
on maritime development since the Port relies on an understanding that maritime 



* From The Economic Structure of California Sea Ports, Dennise M. King, PhD. and 
James Liedke-Konow, 1985; produced by National Technology Information Service, U.S. 
Department of Commerce, Springfield, Virginia, as part of a California Sea Grant 
College Program, La Jolla. 

** The Cit/s Chief Administrative Officer's 1985 report on the state of the City's 
infrastructure estimates the Port's facilities to be worth at least one billion dollars. The 
Port's staff states that no one knows the true value of the Port. A comprehensive 
appraisal of the Port property has never been made. 

BOARD OF SUPERVISORS 
BUDGET ANALYST 
-14- 



development benefits the City more than commercial development and because of 
certain City Planning and Bay Conservation and Development Commission (BCDC) 
restrictions on the use of Port land. The City Planning Department and BCDC restrict 
the Port from developing its maritime reserve lands with non-maritime projects which 
would restrict future maritime activities. Therefore, the Port has not aggressively 
pursued commercial development alternatives for its maritime designated lands which 
either could be placed on the periphery of maritime facilities without interfering with 
their use or could be placed temporarily within Port maritime zones. 

The Port needs to emphasize the point that, because the non-maritime commercial 
development of the Port is needed to finance the development and operation of the Port's 
maritime and fishing facilities, what would be considered to be non-maritime commercial 
development could be considered to be development for maritime purposes. For the Port 
to maintain and to expKind its maritime or its fishing facilities and/or operations, it needs 
to increase the income generated from its commercial operations. 

However, the State Lands Commission restricts the Port from projects which are 
required to finance the maintenance and development of Port lands for public trust 
purposes. In fact, the State Lands Commission cites the Port's public trust 
responsibilities in turning down approval of Port projects which not only are needed to 
finance other maritime and fishing projects but would also directly serve the public. The 
State Lands Commission restricts the Port to the public trust doctrine embodied in the 
State Constitution. This doctrine requires that Port lands be used for purposes of 
statewide importance and not purely private use. The State Lands Commission restricts 
the Port from developing office space or other facilities unrelated to the conduct of 
water borne commerce or pur|X)ses of statewide importance. The State lands 
Commission requires that the Port and its pxjtential developers submit criteria 
demonstrating that the potential tenants are directly related to the maritime or fishing 
industries and that there is a demand by such potential tenants for 150 percent of the 
space proposed to be developed. For example, plans to build housing on Pier 45 were 
explicitly prohibited under the public trust doctrine of the State Lands Commission. 

BCDC also has mandates which, as they are applied to the Port, are 
contradictory. While BCDC's Bay Plan encourages the Port to develop facilities for 
water related uses and public access to the Bay, it also is constrained to limit the Port's 
capacity to finance these facilities. The position of the State lands Commission and 
BCDC that, in effect, the Port must put all development to low revenue producing 
maritime purposes or do no development at all is untenable. The Board of Supervisors 
could memorialize the State Legislature to amend the McAteer-Petris Act (governing 
BCDC) and the Burton Act (transferring the State trust lands) in order that the unique 
development potential and benefits of the San Francisco Port be allowed in such manner 
that the fundamental intent of these two acts may be fully carried out. 

Because of the limited revenues available from maritime and fishing industry use, 
additional revenues from other commercial operations are needed to fund additional Port 
development in the maritime and fishing areas. The Port currently receives 
approximately 66 percent of its revenues from its Commercial Property Department 
(including 49 percent from commercial property rentals and 17 percent from maritime 
property rentals) and only 27 percent of its revenues from its Maritime Affairs Division 
operations. 

An effect of the Port's inability to aggressively pursue commercial development is 
demonstrated by the more than one million square feet of undeveloped or underutilized 
Port property. For example, four Port parcels on Piers 27/29, 70, 80, and 94/96 have 

BOAFID OF SUPERVISORS 
BUDGET ANALYST 
-15- 



been vacant for over a year. These parcels alone contain over 434,000 square feet of 
office and open and enclosed industrial space. There are additional thousands of square 
feet of Port property on finger piers and various seawall lots which are either unused or 
underutilized. These properties are listed in the Appendix. 

Nevertheless, the Port has been recently involved with several development 
projects. The following lists the status of these projects: 



Project 



Status 



Ferry Building Complex 
Piers 1*^, 3, and 5 
Pier 7, Fishing Pier 
Pier 35 Passenger Terminal 

Hyde Street Pier/ Pier 45 
Fishermans Wharf Breakwater 



In litigation 

Awaiting BCDC and other agency permits 

Plans nearly complete 

Passenger lounge completed 

Additional improvements are being studied. 

Preliminary plans made 

Under construction 



Of these projects, the Hyde Street Pier/Pier 45 project is an interesting case 
study. It is a mixed-use project in which commercial hotel development on Pier 45 is 
being used to finance facilities to serve the local fishing industry at the Hyde Street 
Pier. Developers will be given the option of building and operating the Hyde Street Pier 
as part of the public investment required of them, or to pay for the development at the 
Hyde Street Pier "up front." This project integrates both commercial and fishing 
industry development not only in the financing of one part with the other but by 
integrating both in the environmental and regulatory process. Such multi-use integration 
of development could be considered for land throughout the Port. 

Because aggressive commercial development of the Port is essential to the Port's 
maritime and fishing purposes, the Port must form a clear long term strategic plan for 
commercial development which will complement and finance future maritime 
development and maintenance. However, the Port may be forced at times to relinquish 
certain maritime facilities in order to raise funds to develop other maritime facilities 
which may give more benefit to the City. In the Port's current situation, in which all of 
its current financial capacity has been obligated to support its revenue bonds and its 
facilities have significant maintenance and repair requirements unmet, a reasonable, 
detailed, and aggressive development strategy is essential. 

In the immediate term, currently unused Port property could be developed by 
private developers under contract to the Port. The revenues from such development 
could be used to retard and, eventually, to eliminate the continued deterioration of Port 
facilities caused by deferring required maintenance and repair. The Port could give 
special emphasis to developing additional revenue sources to fund the rehabilitation of 
the Fishermans Wharf area's structural supports of old weathered wooden pilings. These 
pilings support the area's piers, restaurants, public space and the public use and parking 
area around and including Pier 43 and Pier 43fe. 

Over the short-term, say ten years, with the implementation of an aggressive 
development strategy, the Port could develop its unused and underutilized property and 
could at least double its current rental revenues from its present revenues of $19.3 
million ($29.3 million including revenue from shipping facility use) annually to 
approximately $40 million annually. Including an additional approximately $10 million in 
revenue from shipping facility use for a total of $50 million, this would amount to only a 
gross 5.0 percent revenue return from property estimated to be worth more than one 



BOARD OF SUPERVISORS 
BUDGET ANALYST 
-16- 



billion dollars. In addition, the Port could create a reasonable long term development 
strategy which would provide it, within twenty years, with annual revenues from its 
property equal to a conservative ten percent of the propert/s value, amounting to 
approximately $100 million annually or over $70 million more than it is presently 
realizing on an annual basis. Managed well, the Port could earn considerably more than a 
10 percent gross revenue return from its properties. 

Implementing a Port development strategy would incur significant additional cost 
to the Port. The rehabilitation of currently developed Port property is estimated to be 
$20 million annually over a ten-year period. However, the Port has not made active 
plans to rehabilitate its property. In order to aggressively develop the Port's unused and 
underutilized properties, the Port must have a development staff and significant 
additional capital investment. The Port could develop its property through the use of 
agreements with private commercial property firms. 

The Port could take an impKjrtant initial step towards instituting an increased 
emphasis on commercial development by revitalizing the current Commercial Property 
Department. A proposed Property Management Division could be organized as shown on 
page 19 and would consist of three departments: Lease Administration, Marketing, and 
Development. The existing staff would continue to administer the programs concerning 
leases and licenses, develop new leases and agreements and actively promote the Port's 
property. Marketing services could come from staff or contractual services as discussed 
in Section III.4. Planning and development assistance is needed to develop a strategic 
development plan for the Port. A plan with a timetable and cost estimates could be 
developed for evaluation by the Port Commission. 

Under the Commercial Property Department's current status, it appears to be a 
passive money collector with staff that is there merely for the maintenance of 
accounts. We believe it should be charged with the responsibility of developing new 
leases, marketing and improving its business methods. It would also focus on a program 
to rebuild existing Port facilities and to develop the Port's unused property. 

CONCLUSION 

At least one million square feet of Port property is either unused or 
underutilized. The Port's managers have not developed an integrated plan in order 
to use the Port's valuable commercial property resources to finance the 
development of facilities for the maritime and fishing industries. The Port's long 
term development strategy could include the means to receive at least ten percent 
gross return on the estimated $1 billion value of Port property. However, the 
current application of State laws hinder the Port from developing its land 
profitably, although such "profit" is needed to finance other Port objectives which 
the same State laws encourage. 

RECOMMENDATION 

We recommend that the Port submit legislation to the Board of Supervisors to 
memorialize the State Legislature to amend the McAteer-Petris Act and the 
Burton Act to allow for the unique development potential and benefits of the Son 
Franciisco Port. The proposed legislation should enable the fundamental intent of 
these two acts to be applied such that the land near the Bay would be developed for 
water related uses, and public access to the Bay while fully supporting the 
maritime and fishing industries. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 
-17- 



We recommend that the Port develop and implement a strategic plan 
including the development of all of its commercial property to assist the financing 
of facilities for the maritime and fishing industries. Such a plan should include the 
means to receive at least a ten f^ercent gross revenue return on the estimated $1 
billion value of Port property. As an initial step, the Executive Director should 
create a Property Management Division as discussed above. 

COST/SAVINGS/BEhEFITS 

The implementation of this recommendation would require the Port to spend 
an estimated $20 million annually over ten years and would require a significant 
undetermined amount of capital investment and personnel cost. By aggressively 
pursuing the development of this unused and underutilized property, consisting of at 
least one million square feet, the Port should be able to negotiate agreements with 
private commercial development property firms to develop its unused and 
underutilized Port property in order to raise the revenue necessary for its 
maintenance requirements. 

The full implementation of this recommendation would allow the Port the 
means to develop all of its property and to finance facilities, as needed, to serve 
the maritime and fishing industries. This would include the means to receive an 
additional $20 million per year by the end of the next ten years and an additional 
$50 million annually within twenty years or in excess of $70 million annually over 
current annual revenues of $29.3 million. 



BOARD OF SUPERVISORS 
BUDGET ANALYST 
-18- 



PORT OF SAN FRANCiSCO 



PROPOSED ORGANIZATION 



( Port Commissioners^ 



Port Director 



C 



Engineering & 
Maintenance 



Engineering 



1 



Maintenance 



-^Enginer 



ing 



Architecture 



Inspection 



Tugs and 
Dredges 



Operations 



Utilities 



Structures 



^ Property Management J 



Lease 
Administration 



I ^DevelopmentJ 



^ Marketing 



{ 



Finance & Administration 



Accounting 



Data 
Processing 



Personnel 



Maritime Affairs 



^ Marketing J 



Sales 



Public 
Relations 



- Intermodal 



Wharfinger 



J 



-19- 



SECTION K2; FACILITY ACCOUNTING 

SINCE THE PORT DOES NOT ALLOCATE REVENUES 
AND EXPENDITURES TO ITS SPECIFIC FAQLITIES, 
THE PORT DOES NOT KNOW EITHER THE TOTAL 
COSTS OF ITS SPECIFIC FACILITIES OR WHETHER 
ThESE FACILITIES ARE OPERATING AT A PROFIT 
OR A LOSS. AS A RESULT, THE PORT IS NOT 
ALWAYS ABUE TO OPERATE IN A BUSINESSLIKE 
MANNER. WITH THE LACK OF THIS BASIC COST 
INFORMATION, THE PORT IS HAMPERED IN 
MAKING SOUND DECISIONS AND DOES NOT KNOW 
IF THE EXPENDITURES MADE AT A SPECIFIC PORT 
FACILITY ARE JUSTIFIED BY THE REVENUES 
GENERATED BY THAT FACILITY. FOR EXAMPLE, 
THE PORT DOES NOT KNOW THE MAINTENANCE 
COSTS OF EITHER FIShERAAANS WHAF^ OR OF 
PIER 94/96. 

The Port manages its own nnaritime, fishing and connmercial property which 
extends from the Hyde Street Pier on the north to India Basin on the south. These 
properties are used for fish processing, restaurants, offices, passenger terminals, a 
foreign trade zone, ship repair, automobile parking and open space as well as for the 
storage and movement of breakbulk, dry bulk and liquid bulk and container ship cargoes. 
Port facilities require Port expenditures for maintenance and repairs and for the 
provision of capital improvements. Estimated to have a total facility value of at least 
one billion dollars, in 1985 these facilities generated $29 million in revenues from five 
sources: 

Funds from agreements for the operation of cargo facilities; 

Maritime related rents: revenues received from maritime related uses such as 
fishing operations, tugboats, passenger lines and railroads; 

Rental fees for the use of non-maritime Port facilities: flat monthly rental 
fees for use of Port space, including offices, restaurants and other commercial 
uses; 

Percentages of non-maritime gross receipts: Port rents based on a percentage 
of monthly gross receipts for facilities including restaurants, gift shops, parking 
lots and gasoline sales. While all non-maritime facilities pay a rental fee to the 
Port, only some pay a percentage of gross receipts in addition to their base 
rent; 

Ship repair payments: rental payments from tenants of the ship repair 
facilities. These rental revenues are currently recorded as maritime revenues. 



BOARD OF SUPERVISORS 
BUDGET ANALVSI 

-20- 



Monogement Concerns 

The Port has established goals, as reflected by the goals in its Management By 
Objectives (MBOs) plan, for maximizing the total revenues received from its existing 
developed facilities. The Port Commission receives information on the cost of operation 
of the various Port programs, such as the maintenance program, as well as the total cost 
of operation of each division and dep>artment of the Port. As a result, the Commission 
knows the total costs of operation and the total revenues generated for the Port and 
evaluates performance by comparing actual costs to amounts budgeted for each 
particular organizational unit. But the Commission does not receive cost information for 
each specific facility. For example, the Port does not know the maintenance costs of 
either Fishermans Wharf or of Piers 94/96, even though they receive information on total 
Port maintenance costs. 

The Port has not established, as one of its objectives, the maximizing of the profits 
of each of its individual facilities and has not directed staff to analyze the profitability 
of each of the Port facilities. Nor has the Port Commission established a minimum 
acceptable rate of return which the Port is expected to receive from the management of 
each parcel of Port land. As a result, while the Port as a whole may be operating at c 
profit, individual facilities may be losing money or simply earning less revenue than if 
they were used for another purpose. In addition, without reference to the profitability of 
individual facilities, the Port cannot effectively judge whether a particular expenditure 
at a facility is justified by likely increases in facility revenues (see Section II. I). 

The data necessary to measure whether or not each Port facility is operating 
profitably is currently not readily available. The Port does not collect information 
concerning the cost to operate any of its facilities and does not readily have data for 
revenues generated by each facility, although revenue information for each facility could 
be manually tabulated from existing files. The Port also does not allocate capital 
expenditures, debt service expenses (which will average more than $6 million per year 
through the year 2008), or depreciation costs, and internal overhead expenses including 
administration costs, accounting costs, and data processing costs. Because the Port does 
not account for its total costs or revenues by facility, it cannot analyze a facility as c 
cost center and compare the cost to operate that facility to the revenues generated by 
it. For example, if the Maintenance Department makes a repair to a particular pier, the 
appropriate program accounts are charged based on the information on the job order. 
However, since there are no charges shown against the pier, the Port does not know the 
cost to operate and maintain that facility. As a result, the Port is unable to decide 
whether continuing the current use of that facility is desirable.* 

This weakness in cost and revenue accounting hinders both the short-term and long- 
term planning and the development of policies affecting the Port. The absence of cost 
and revenue accounting by facility was pointed out in a 1983 audit of the Port by 
Deloitte, Haskins and Sells, and has been discussed in'subsequent Port audits. However, 
the Port has not yet implemented an accounting system which would assign costs and 
revenues to the associated facility. 



* The fact that a facility or service op>erates at a loss does not necessarily mean 
that it should be discontinued. For example, the City offers many services for which 
certain departmental revenues are much less than expenditures. 



BOARD OF SUPERVISORS 



BUDGbl ANALYSI 

-21- 



The Port has planned to implement a computerized cost accounting system in the 
current year and requested approval from the Electronic Information Processing Steering 
Committee (EIPSC) to begin immediately. EIPSC is now considering this request. The 
Port has plans to incorpKjrate revenue accounting by facility in this proposal. Regardless 
of the outcome of its EIPSC request, the Port should immediately begin to collect cost 
and revenue data by facility. This data will be needed for entry into the computer, if 
approved, and can be analyzed manually if the computer request is instead denied. 
Analysis of this manually gathered data could aid the Port staff in developing the 
requirements for the proposed computer system. 

CONCLUSION 

The Port does not allocate revenues or expenses by facility and thus cannot 
make informed management decisions about the use of each of its facilities. As a 
result, the Port is not always able to operate in a businesslike manner, using 
information and developing strategies that are based on sound financial and 
management analyses. This is particularly damaging to the Port, because unlike 
other City departments, the Port must generate all of its own revenues. Good 
business practices ore crucial to the survival to the Port. 

RECOMMENDATIONS 

The Port should immediately begin to track revenues and total costs by 
specific facility in order to determine the operational and maintenance costs of 
each facility and in order to determine the revenues which will result from these 
expenditures. 

SAVINGS/BENEFITS 

Cost and revenue accounting by facility will allow Port staff to make 
informed management decisions about its facilities and improve both short and long 
term planning and policy making. 



BOARD OF SUPERVISOfRS 
BUDGET ANALYST 



SECTION 1.3: COLLECTION PROCEDURES 



THE PORPS ACCOUNTING DEPARTAAENT HAS 
INADEQUATE POLICIES FOR THE COLLECTION OF 
THE PORPS DELINQUENT ACCOUNTS RECEIVABLE 
OWED BY ITS TENANTS, THE PORT CURRENTLY 
HAS DELINQUENT ACCOUNTS AMOUNTING TO 
$3.68 MILLION INCLUDING SOME ACCOUNTS THAT 
ARE OVER TWO YEARS OLD. AS OF MARCH, 1986, 
NINE TENANTS OWE THE PORT MORE THAN $1.6 
MILLION AND HAVE BEEN IN ARREARS FOR OVER 
60 DAYS. THE PORT HAS WRITTEN OFF BAD 
DEBTS OF OVER $700,000 IN 1985, AND OVER 
$400,000 IN 1984. AS OF 12/31/85, 63.2 PERCENT OF 
THE PORPS ACCOUNTS RECEIVABLE WERE PAST 
DUE BY 90 DAYS OR MORE. REVISING PORT 
COLLECTION POLICIES AND INCRE/VSING TENANT 
SECURITY DEPOSITS WOULD INCRE/VSE PORT 
REVENUES BY AT LEAST AN ESTIMATED $40,000 
ANNUALLY. 



The Accounting Department of the Finance and Administration Division is 
responsible for collecting monies owed to the Port. These monies are known as accounts 
receivable. The majority of the receivables collected are commercial rent payments for 
Port facilities including restaurants, offices and related uses. Some tenants are also 
billed for Port-supplied electricity purchased by the Port from Pacific Gas and Electric 
(PG&E) (see Section IV.3), other tenants are billed for the use of monthly parking spaces, 
some tenants pay for repairs or other construction to Port property and some tenants and 
non tenants are billed for damages done to Port property for which they are responsible. 
In addition, the Accounting Department administers the Port's revenue sharing program 
with shipping companies and terminal operators. 

Collection Standards 

The Port requires tenants to deposit an amount equal to the tenant's minimum 
monthly rent, for tenants with percentage of gross receipts rentals, or actual monthly 
rent, for tenants with flat rate rentals. The Billing Section of the Accounting 
Department mails bills for tenant rentals on the first of the month for rent due that 
day. Persons who rent parking spaces must pay their rent to the Port by the twentieth 
of that month or the Department will consider their account to be delinquent. Tenant 
rentals are considered delinquent if not paid by the first of the month but the Port does 
not pursue delinquent accounts until thirty days past due. Until recently, after thirty 
days from the due date, the Collection Manager would mail a manually generated 
delinquency notice to the tenant and place a note in the tickler file indicating that 
further action should be taken fourteen days later. The Department has developed a 
computer process which automates this stage of the collection process which was 
recently put into operation in March, 1986. After another fourteen days, delinquent 



The Port mails electric utility bills once a month after the Port receives the 
billing from Pacific Gas and Electric and adds on the Port's 25 percent surcharge. These 
bills are not necessarily mailed on the first of the month. 



BOARD OF SUPERVISORS 



BUD<Jbl ANALYSI 
-23- 



tenants are sent a final notice. Copies of these notices are sent to the City Attorney's 
Office and to the appropriate operating division (to the Commercial Propertv 
Department for delinquent rents, or to Maritime Affairs for delinquent shiooinq 
accounts, for example). Finally, after another seven days, the City Attorney's Office 
sends the delinquent tenant a three day notice to either pay or leave the premises. The 
Port then takes legal action against clients who are delinquent in paying monies owed to 
the Port. Such actions include the serving of complaints of unlawful detainer and the 
petitioning of small claims court. 

The Port's Commercial Property Department staff have stated that they ore 
concerned about getting the delinquent tenant removed from the Port property because 
by getting the delinquent tenant out of Port property, it can be rented to a new oayinq 
tenant before further rental income is lost to the Port. However, the Port could evict 
non-paying tenants and reduce rent losses by combining effective eviction and collection 
procedures and by increasing tenant deposits as described below. For example, if the 
eviction process took two months and the tenant did not pay anv rent to the ^ort, an 
increased deF>osit equal to the two month's rent could assure that the Port would not lose 
money from the delinquent tenant. 

Deposits 

The Port requires tenants of Port property to post a bond equal to one month's rent 
as security for the Port in the event that the tenant neglects to pay the required rent. 
The form of this bond can be either cash or an investment instrument that is acceptable 
to the Port. For cash deposits, the Port retains interest earnings. For instruments held 
by tenants, the tenant retains the interest earned. 

The Port does not require deposits for other Port services such as the provision of 
electricity or repairs for Port property used by tenants. Similarly, the ^ort does not 
require security dep>osits for fXJtential damage to Port property rented by tenants or for 
the trans|X)rtation and storage of tenant property that is left in or on Port facilities 
should the tenant be evicted from or abandon the Port property. 

The thirty day rent deposit is inadequate for an eviction process that takes a 
minimum of 54 days to complete and the eviction can take much longer because the 
eviction process often requires the Citv Attorney to take action to remove tenants who 
do not wish to leave Port facilities. Tnus, the Port is unnecessarily exposing itself to a 

loss of at least 24 days rent because the deposit amounts do not completely cover the 
rent for the time required to evict a tenant. 

Because the eviction process can take so long, a case can be made that the required 
deposit should be the equivalent of three month's or more rent. However, this could be a 
major burden for many tenants. Therefore, we recommend that the deposit for tenants 
should be increased to the equivalent of only two month's rent plus an amount for 
potential damage to rented Port property, security, moving and storage of tenants' 
property. Such a deposit could be fully refundable at the end of the tenancy, if 
appropriate. Tenants who wish to use a certificate of deposit would also include the 
Port, as a co-holder of the certificate as per present practice. In addition, as long as the 
Port provides electricity to its tenants, it could also require a deposit of the estimated 
equivalent of two month's billings for electrical service, which is the PG&E standard. 

In 1984, the Port wrote off bad debts of $477,501 and in 1985 the Port wrote off 
$753,321.* Based on a sample of writeoffs in accounts that could be protected by a 
deposit, we estimate that at least $40,000 annually need not have been written off by the 



BOARD OF SUPERVISORS 



BUDGET ANALYS I 

-2't- 



Port had the Port had a deposit policy described above. Deposits could have been 
forfeited and absorbed by the Port as an offset to delinquent rental revenues. As of 
December 31, 1985, the Port's Accounts Receivable totaled $3.68 million of which 
$2,331,637 or 63.2 percent is in accounts more than 90 days past due. The Port's outside 
auditors annually adjust the Port's receivable accounts by establishing a reserve for bad 
debts to reflect the anticipated level of collectable receivables. Applying the outside 
auditors' most recent estimate of the potential rates of uncollectables to the Port's 
current accounts receivable balances, the Port has a potential write off of bad debts of 
as much as $1,428,000 or 38.8 percent. In other words, the Port can expect that, based 
on past practices, over one third of the money due to the Port will not be collected. 

The Port has had problems collecting the deF>osits required by Port policy. The 
Commercial Property Department files have copies of letters to tenants requesting 
tenants to pay additional deposit monies for rent increases that took place many months 
before. As of December 31, 1985, the Accounts Receivable report lists $44,504 of 
deposits that are past due. Of this amount, $10,235 is overdue by thirty days and 
$34,269, or over 77 percent, is overdue by ninety days or more. However, these accounts 
have been reduced to $3,782 and $2,150 respectively in the past three months. The 
collection of deposits should be a high priority. The Port should collect any deposit due 
before a tenant occupies Port space, and such deposits should be collected as 
expeditiously as possible from tenants whose rent is increased. 

The Port will continue to lose money from tenants who have delinquent accounts 
that are "covered" by inadequate dep>osit amounts. The Port Commission could improve 
its deposit policy by increasing deposits for tenants and by requiring deposits for 
accounts not previously covered such as electrical service, parking stall rentals, and 
miscellaneous services to tenants; such a policy would discourage tenant delinquency and 
provide the Port with additional protection. 

Account Receivable Writeoffs 

According to the Collection Manager, of the Port's $3.68 million in overdue 
accounts for rent, utilities and damage to Port facilities, 192 accounts, valued at 
approximately $2.36 million or 64 percent, are more than sixty days delinquent. As of 
12/31/85, 63.2 percent of the Port's accounts receivable were past due by 90 days or 
more. 

The following list of Port tenants is an example of the Port's delinquent accounts 
receivable. Each of these nine tenants have delinquent accounts to the Port in excess of 
$50,000 all of which all are over sixty days past due: 



* According to Port Policy statement number 6, a write off is money to be 
deducted from the Accounts Receivables because this money owed to the Port is either 
"uncollectable" or "not cost effective to pursue". 



BOARD OF SUPERVISORS 



BUDGET ANALYST 

25- 



S. F. Port Delinquent Accounts Greater Than $50,000 
Overdue by 60 Days or More as of March, 1986 



Customer 



Total Balance Due 



Past 60 Days 



California Close Corp. 
Coastline Associates 
Delta Steamship Lines Inc. 
Dispatch Transportation 
Fritz Maritime 
Marine Terminals Company 
Postermat Friedman Enter. 
Roundhouse Investors 
Sailing Ship Dolphin P. R. 



$ 728,494 



83,490 
91,733 
80,234 
125,501 
54,489 
111,918 
348,845 
162,525 



$703,001* 
79,861 
85,726 
76,736 

124,610 
52,513 

102,458 

237,657** 

149,21 1 



Total 



$1,787,229 



$1,611,773 



* According to the Port, California Close Corp has recently declared bankruptcy. 

** Board of Supervisors action to allow the deferment of rent based on the Port's 
representation that, otherwise, the project would fail. 

As previously stated, the Port has a potential write off of accounts receivable, according 
to rates established by the Port's outside auditors, of as much as $1,428,000 of the 
current $3,684, 1 29 balance of accounts receivable or approximately 39%. 

The Port has had problems with settlements from non-tenants who damage Port 
property. The Port often agrees to accept an amount less than the actual cost of 
repairing the damage because of application of the Port's write off policy, applying a 
depreciation factor, and/or inaccurate estimates of damage by staff. Typically a 
facilities damage report describing damage to maritime facilities is made by the 
Wharfinger or Maintenance Departments. The Port's staff estimate cost of the damage 
and the bill for this amount is then sent to the shipping compKiny for jxiyment, while the 
Port repairs the damage. The shipping line may sometimes question the estimated 
amount and the Port negotiates a settlement with the company. A major factor can be 
the application of a depreciation allowance of up to 50 percent in some instances. 
Writeoffs from these settlements were $136,892 or 48.8 percent less than the estimated 
cost to repair damage to the Port's facilities in 1985 which amounts to $280,544. The 
$136,892 does not include any service and penalty charges which were also written off. 

Besides writeoffs, the Port also adjusts many accounts downward, often by large 
amounts. These downward adjustments are similar to writeoffs and they should be 
subject to the same provisions as the Port's write off F)olicy. 

The aging summary reports that the Accounting Department staff uses for 
delinquent revenues lists accounts and dollar amounts in arrears by current, (0 to 29 days 
past due), 30 days (30 to 59 days past due), 60 days (60 to 90 days past due) and 90 days 
(more than 90 days past due). These reports can be misleading because once an account 
becomes overdue by ninety days, it is aggregated with all other accounts that ore 
overdue by at least ninety days. This report could be made more informative if two 
additional time periods were used - 180 days (180 days to 364 days post due) and one year 
(more than one year past due). This progression of time for overdue accounts permits 
better analysis of the status of overdue accounts. 



BOARD OF SUPERVISORS 
BUDGET ANALYST 



The Port does not (Xirticiixite in the delinquent revenue collection program 
administered by the Bureau of Delinquent Revenue Collection of the Tax Collectors 
Office (Administrative Code Sections 10.37 to 10.^2) because Administrative Code 
Sections 10.38 and 10.41 sjDecifically requires the Port to collect its own delinquent 
revenues. According to a representative from the Tax Collector's Bureau of Delinquent 
Revenue Collections, each employee in the Bureau manages an estimated 1,000 cases per 
year, while the two Port staff assigned to delinquent collections manage an estimated 
350 accounts per year that are delinquent by sixty days or more. The cases managed by 
the Bureau of Delinquent Revenues generally involve individuals whereas those managed 
by the Port generally involve companies. The Port also does not use the services of a 
privately owned collection bureau. These private firms generally charge up to fifty 
percent of revenues collected for their services. The Port should explore the use of 
these services as an alternative to completely writing off some of its accounts. 

The Accounting Defxirtrnent could improve the collection process in other ways. 
First, billing notices for rent could be mailed to tenants at least ten days before they are 
due for collection, rather than on the first of the month as is currently the case. This 
would give the Port's tenants additional notice. Second, by the tenth day after the 
payment for any Port charge is due, the Port's staff could generate notices to tenants 
reminding them that their account is overdue by ten days. Finally, the Port could use 
collection policies and procedures developed by collection agencies. The Fiscal Officer 
states that his staff is developing a detailed collection procedure. We recommend that 
staff also consider using procedures already in place at existing collection agencies. 

Procedure Manual 

Port staff does not have a thorough understanding of its authority for using 
available collection methods. The staff admits to not knowing the basis for many of its 
actions, some of which are inconsistent with Port and/or legal requirements. For 
example, Accounting Department staff has added service charges to delinquent accounts 
although the staff did not have written authority for such service charges. (The Fiscal 
Officer states that he has just received a written opinion from the City Attorney on this 
matter). To eliminate any possible confusion, all future agreements should state that 
the Port will add penalties, interest and service charges to delinquent accounts as 
appropriate. In another example, clients are charged $10.00 for checks returned to the 
Port because of insufficient funds since the City's Administrative Code allows for a 
penalty of that amount. The Port does not follow the Administrative Code, because it 
retains the money instead of allocating it to the City's General Fund, as per the Code. 
We recommend that the Administrative Code be amended so that the Port could 
unqualifiedly retain monies it collects for the insufficient funds account. 

The Accounting Department follows Port policy concerning when and under what 
circumstances staff should write off bad debts but often leaves delinquent accounts on 
the Port's books for many years (the majority of these accounts ore in litigation). The 
major criteria for writeoffs are those delinquencies which are "uncollectable" or "not 
cost effective to pursue." Some delinquencies are sent to the City Attorney's Office for 
legal remedy. Presently, this Office has 33 active cases of which 23 now have suits filed 
against the delinquent tenant. In 1985, the City Attorney's Office settled seventeen 
cases, and collected $264,577. Other delinquent accounts have been carried for seven 
years with little hope of collecting these revenues in total. The Accounting Department 
is recommending writing off many of these accounts. 



BOARD OF SUPERVIS ORS 

BUDOET ANALYSl 

21 



The Port's Fiscal Officer has develofjed policies which have been approved by the 
Executive Director for collecting delinquent revenues. However, imp>rovements could be 
mode as follows: 

The proposed policy statement generally does not cite the authority (State Law, 
City Charter Section, Port Resolution, etc.) to carry out the policies 
described. An employee who would use this document would not know the legal 
basis for taking many actions. 

The proposed policy does not clearly state what the employee is to do under 
many of the probable conditions that would be encountered. Thus an employee 
could possibly take incorrect action because there are no specific instructions 
available. 

There are many specific items of concern to both the Budget Analyst and the 
Internal Audits Division of the Controller's Office regarding the proposed 
policy. These concerns have been voiced to the Accounting Department and the 
policy has been amended in accordance with some of the recommendations. 

The policy for writeoffs should clearly relate to downward adjustments of 
billings as well as writeoffs of delinquent billings. 

We encourage the Accounting Division to continue developing policies and 
procedures to include all department functions, and to include the laws, rules, 
regulations, Port Commission actions and other appropriate authority to take action. 
These procedures should be develoF>ed in a timely manner. A complete procedures manual 
would facilitate good staff operation and could increase Port revenues. 

CONCLUSION 

While, the Accounting Department has improved the accounts receivable 
process and collections and is continuing this effort by proposing new procedures, 
collection practices are not as aggressive as they could be, deposits are 
insufficient, the number of bod debts is excessive and the Port's collections policy 
still needs additional clarification. 

RECOMMENDATIONS 

We recommend that the Finance and Administration Division: 

- Send tenants a rental notice ten days before the monthly rent is due. 

- Develop and install new collection procedures, citing authority for actions, and 
including amending the write off policy to include downward adjustment of 
accounts. 

Increase tenant deposits; 

- Develop a comprehensive procedures manual which addresses all such collection 
issues and details the circumstances and authority under which any actions can 
be taken; and 



BOARD OF SUPERVISORS 



BUDGET ANALYST 



Develop a program to improve the collection of facility damage claims in order 
to determine the prop>er amount due to the Port, in conjunction with the 
Wharfinger's Department. 



SAVINGS/BENEFITS 

The Port will benefit by improved collections and fewer bad debts. Estimated 
increased revenues to the Port, including increased interest income, will amount to 
at least $40,000 annually. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 



SECTION II 
MARITIAAE ISSUES 



BOARD OF SUPERVISORS 
BUUUnI ANALYSI 

-30- 



SECTION 11. 1: CAPITAL PROJECT PLANNING 



ThE PORT IS COMMITTING MILLIONS OF DOLLARS IN 
BOND FUNDS AND OTHER FUNDS TO MODERNIZE 
CARGO HANDLING FAQLITIES IN THE HOPES OF 
CAPTURING MORE CONTAINER SHIPPING BUSINESS. 
THE PORT HAS ORDERED TWO NEW CRANES AND IS 
ACQUIRING ONE USED CRANE AT A COST OF $6.9 
MILLION. ADDITIONALLY, THE PORT PROPOSES TO 
REBUILD ONE OF ITS OWN CRANES AT A COST OF $1 
MILLION EVEN THOUGH THE USE OF THE PORPS 
CRANES IS FAR BELOW THE INDUSTRY AVERAGE. IN 
FACT, TO INCREASE THE PORT'S PRESENT CRAf^C 
USAGE TO THE INDUSTRY AVERAGE, THE PORT 
WOULD HAVE TO INCREASE THE ANNUAL NUMBER 
OF CONTAINERS MOVED BY 227 PERCENT FROM AN 
AVERAGE OF 15,303 CONTAINERS TO AN AVERAGE 
OF 50,000 CONTAINERS FOR EACH OF ITS SEVEN 
EXISTING CRAIvES WHICH ARE NOW USED LESS THAN 
FIVE PERCENT OF THEIR AVAILABLE TIME. 
CLEARLY, BY ADDING THREE CRANES FOR A TOTAL 
OF 10 CRANES, THE PORT'S CONTAINER HANDLING 
CAPACITY WILL FAR EXCEED ANY CARGO 
PROJECTIONS WELL INTO THE NEXT DECADE. 
THEREFORE, THE PORT SHOULD DEFER THE 
PROPOSED $1 MILLION REBUILDING OF ITS CRAhE 
AND DEFER AN ADDITIONAL ESTIMATED $4 MILLION 
FOR OTHER CARGO HANDLING IMPROVEMENTS. 
THIS TOTAL OF $5 MILLION SHOULD BE 
PRODUCTIVELY USED FOR THE DEVELOPMENT OF 
SEVERAL COMMERCIAL REVENUE PRODUCING 
CAPITAL PROJECTS ON PORT PROPERTY. 



Historical Bockground 

Until the mid-1960s, most materials were shipped on "break-bulk" ships — merchant 
ships on which commodities were carried in bags or on pallets. After 1965, a number of 
dramatic changes were made in the shipping industry. The first was the development of 
cargo containers— sealed steel boxes twenty or forty feet long, eight feet wide and eight 
feet high. This development improved packing, security and handling of goods and 
delayed their spoilage. Special railroad cars were developed to handle the new 
containers and a new type of cargo crane was developed to load and unload containers 
from ships that reduced the number of stevedores required for cargo handling. In 
addition, the development of very large container ships, supertankers and barges has 
lowered the cost of shipping because the ratio of expenses to the amount of cargo being 
shipp>ed has been reduced. 

Computers and telecommunications equipment also have begun to be used to track 
the location of containers, ships, railcars and cranes, monitor loading and off loading 
times and to aid navigation. These technological developments have served to reduce 
shipping time from source to ultimate destination. Each of these developments have 
improved efficiency, reduced shipping expenses and created intense competition among 
ports to move cargo in the shortest amount of time to its ultimate destination. 



BOARD OF SUPERVISORS 
BUDGET ANALYST 
-31- 



Copital Spending 



The Port of Son Francisco did not make a major effort to install the eauipment 
required to handle containers until the late 1970s. The Port's Piers 80 and 94/96 were 
developed to transfer containers directly to and from ships. The Port is continuing to 
make improvements in its container handling facilities financed by more than $31 
million, or 73%, of a $42.5 million Port revenue bond issue approved by San Francisco 
voters in November, 1984. These funds are projjosed for maritime shipping improvements 
such as pier modifications, enhanced truck access, additional cranes, more convenient 
railroad facilities and more lighting. The Maritime Affairs Division states that these 
improvements are needed to capture the deep draft (ship), intermodal market. The $1 1.5 
million remainder of the $42.5 million bond issue was allocated to two projects in 
Fisherman's Wharf ($4 million) and bond reserve and exp>ense accounts ($7.5 million). 

Despite the substantial financial commitment the Port is making to maritime 
activities, the criteria used by the Port for choosing to make maritime rather than non- 
maritime capital improvements and for timing the implementation of maritime shipping 
improvements are unclear. There are a number of indications that the Port does not 
have a rigorous method of evaluating the best time for making capital improvements to 
maritime facilities, as shown below. 

Additional Crane Purchases 

Although the numbers of ships and containers coming to the Port of San Francisco 
has steadily grown, the Port currently has considerable excess capacity. For example, 
the industry wide average for container movements per crane per year is about 50,000 
twenty foot equivalent container units (TEU). In Fiscal Year 1984-85, the Port's seven 
container cranes moved an average of 15,303 TEUs each or 30.6 percent of the industry 
standard. On Pier 80, specifically, the three existing cranes moved an average of 
16,806 TEU per crane, or less than 34 percent of the industry standards. Nevertheless, 
the Port is purchasing two new cranes ($5.4 million) and one used crane ($1.5 million) to 
be installed on Pier 80, for a total cost of $6.9 million. The two new cranes were to be 
installed on the south face of Pier 80 to service the Lykes Brothers Steamship Company 
(Lykes Lines) and the used crane would be installed in the east face of the pier. An 
existing crane would be rebuilt at a cost to the Port of $1 million and moved to Pier 
94/96. The Port had expected a dramatic increase in the level of shipping from the 
Lykes Lines from about 38,000 TEU in 1985 to 117,000 TEU by 1988, based on data 
furnished by Lykes Lines.* The two new cranes would then transfer an estimated 58,500 
TEU each in that year, or seventeen percent more than the industry average. Assuming 
that the Lykes data was reasonable, the expenditure of $5.4 million for two new cranes 
would appear to have been justified for operational reasons** even though the Port's 
cranes would be used less than the industry standard. Lykes Lines recently announced 
that it would be withdrawing its ships from the Pacific Ocean region including the Port 
of San Francisco. It is uncertain whether other shipping lines that are present tenants of 



* Data for the increase in traffic by the Lykes Lines and other shipping lines and 
the proposed size and orientation of cranes at Pier 80 were furnished by the Port from 
the Environmental Impact Report for San Francisco Container Terminal Modernization 
(Pier 80) and a draft copy of the Port's consultant report for the same project (January 
1 986 draft). 

**Two cranes are required to unload each of the new large ships. 



BOARD OF SUPERVISORS 



BUDOil ANALYSI 

-32- 



the Port will handle the cargo which Lykes Lines had carried. By having the two 
additional cranes, the Port would have the capacity to serve other shipping lines which 
may pick up Lykes Lines Pacific Ocean cargo to San Francisco. 

The Port has not offered sufficient justification for purchasing the used crane 
rather than using these funds for non-maritime capital projects. Projections for 1988 
call for only 22,000 TEU to be handled on the portion of Pier 80 not supported by the new 
cranes or a total of 7,333 TEU per crane for the three existing cranes*** and the 
purchase of the used crane and rebuilding of an existing crane are not profxjsed in the 
Port's current EIR and draft plans for Pier 80. 

There is little support for rebuilding an existing crane which is to be relocated from 
Pier 80 to Pier 94/96 at a cost of $1 million. The Port's four cranes at Pier 94/96 moved 
56,704 TEU in 1985, an average of only 14,176 TEU per crane. The Port's Maritime 
Affairs Division staff concede that they cannot justify the rebuilding of an existing crane 
based on current use, but assert that their projections of future activity justify this work 
although they cannot quantify this increase. In fact, to increase the Port's crane usage 
to the industry average of 50,000 TEU each, based on the Port's seven existing cranes, 
the Port would have to increase the number of containers by 227 percent from 1 5,303 to 
50,000 TEU per crane which does not appear to be feasible in the near future. In 
addition. Port staff reports that its existing seven cranes are used less than five percent 
of the time that they are available for use and ships presently do not have to wait to 
transfer cargo containers. Therefore, the Port cannot justify the rebuilding of an 
existing crane based on too many ships being in the Port at the same time, which could 
diminish service to the ships because of the unavailability of cranes. Despite 
underutilization of the present cranes, the Port has committed itself to purchasing the 
three additional cranes and to rebuild an existing crane. 

Further, the Port has not established its own standard for evaluating when capital 
projects at maritime facilities are necessary. The Port should develop benchmark 
standards which would signal when capital improvements such as a crane purchase should 
be made. These standards should be set in consideration of industry overages, but need 
not match them exactly. 

ICTF and Tunnel Modifications 

The Port is also constructing an Intermodal Container Transfer Facility (ICTF) near 
Piers 94/96 to move containers directly to and from roilcars and ships, eliminating the 
intermediate steps of unloading and storing the containers and then later loading the 
container onto a railcor. This project is on schedule and the ICTF is expected to become 
operational in November 1986. However, in order to make the ICTF function to most 
efficiently, modifications must be made to two tunnels on the Southern Pacific main 
railroad route between San Francisco and San Jose to allow the taller "Double Stack" 
cars**** to pass through these tunnels. There are two alternatives being considered at 
this time, lowering the tunnel floors to create more distance from floor to tunnel roof or 
building an extra track down the middle of the tunnel (gauntlet track) so that the cars go 



*** Ibid. • 

**** Double Stack cars ore special cars that allow containers to be stacked on each 
other two high, reducing the tore weight relative to the weight of the goods being 
shipped. They are considered excess height cars. . 

BOARD OF SUPERVISORS 
BUDGET ANALYST 

^3 . : 



through the tunnel where the clearance is the greatest. The gauntlet track would take 
about three months to construct. Lowering the tunnel floor would require about six 
months, in a recent article of the American Shipper magazine*****, the Port's Maritime 
Director predicted that both the ICTF and tunnel modifications would be on line in 
November, 1986. However, this prediction has been revised because the exfjected 
approval of the merger between the Southern Pacific Railroad and the Santa Fe Railroad 
has taken longer than expected. The projected date for the completion of tunnel 
modifications has been set back by six months. 

The merger between the Southern Pacific Railroad and the Santa Fe Railroad has 
not been approved, and according to the Maritime Affairs Division, Southern Pacific 
Railroad has indicated that it is unv/illing to make the required tunnel modifications until 
the merger with the Santa Fe Railroad has been approved. The completion of the tunnel 
modifications is important to the goal of the Port to provide full intermodal services to 
shippers. Without the completion of this project, double stack cars cannot be used at the 
ICTF. In addition, at this time, only preliminary plans for the tunnel modifications have 
been prepared; much more time for final planning, construction estimates and ordering 
equipment would still be required. No decision has been made at this time. 

When the $42.5 million bond issue for Port improvements was approved by the 
voters in 1984, $6.4 million of the bond issue was allocated to Pier 96 for various capital 
improvement projects. Among the projects was the modification of two tunnels on the 
Southern Pacific Railroad mainline. The Port's consulting firm for the project made a 
report to the Port in February, 1984, estimating the cost of this project to be from $3.3 
million to $4.0 million. The Port's Maritime Affairs Division now states that they are 
negotiating with a management team that can represent the proposed merged railroad's 
interests with the objective of having the merged railroad make the tunnel modification 
at its own cost and that the $4.0 million in Port monies previously allocated to the tunnel 
modification be used elsewhere. 

Outlook for the Future 

The forty percent increase in Port container facility use necessary to maintain the 
current TEU per crane (including the two new cranes, and the one additional used crane) 
can be attained if the increases its container movements occur as projected and will be 
shipped by existing or future tenants of the Port. However, a large increase to the 
industry average is somewhat questionable at this time. Forecasts for container shipping 
by present shipping lines (other than the Lykes Lines which has announced plans to 
discontinue San Francisco operations) using the Port show small increases. The Port has 
not projected how many more shipping lines/ containers are expected and has not 
projected any timetable for this increase in traffic. Most analysts agree that there is 
currently a worldwide surplus in ship capacity which will continue for at least five more 
years when, at that time, cargoes may have increased and older ships scrapped, thereby 
narrowing the gap between ship capacity and available cargo. It is also uncertain how 
much of the cargo business will come to the Bay Area or to the Port of San Francisco. 
Even with a large annual growth, the Port's crane capacity with the addition of two new 
cranes and the one used crane will be sufficient for many years without a need to rebuild 
an existing crane. 



***** American Shipper, January, 1 986. 

BOARD O F SUPERVISORS 
BUDGET ANALYSl 

-34- 



Alternqfive Improvennents 



In the absence of a demonstrated need for certain of the Port's modernization 
projects at the cargo handling facilities, the Port could consider allocating funds to other 
revenue-generating capital projects. Were the Port to defer the rebuilding of the 
existing crane for Pier and reallocate monies originally planned for construction of 

tunnel modifications, $5.0 million could be reprogrammed into other projects, the 
revenue from which could be used as needed in the future for the shipping facility 
improvements. The Port Commission and the Board of Supervisors would have to approve 
any changes in the use of bond funding through a reappropriation ordinance consistent 
with the purposes for which the bonds were issued. In other sections of this report we 
have identified new revenue sources for the Port. In addition, the Port generates a 
surplus of approximately $5 million annually. There are many projects, such as the 
following, that could be funded by reprogramming some of the bond funds now dedicated 
to maritime uses and using non bond fund monies to develop revenue producing capital 
projects and keep existing facilities in good condition: (Note that such profKJsed 
reprogramming would still be in accordance with the original purpKDses of the bonds ds 
voted by the electorate.) 

In the Appendix, we have identified many sites where commercial revenue 
producing capital projects could be developed. 

Many Port facilities need improvements in fire safety, substructure, electrical 
service, roofing, etc. to maintain safe and continued operation in the future. 
For example, a fire on Pier 1-1/2 in December 1985 could have been a major 
disaster had it not been detected by the Port's guard service. According to the 
Guard who detected the fire, a few more minutes would have meant the loss of 
Piers I, 1-1/2 and 3. These facilities have no fire detection equipment and the 
Guard Service does not patrol the area all 24 hours per day. Similar problems 
exist at other Port facilities. (Section IV.2 regarding the fireboat described this 
issue of fire safety in more detail.) 

The Port proposes to build major fish processing facilities on the Hyde Street 
Pier and other fishing facilities in the Fisherman's Wharf area. At this time, 
funding for these projects has not been identified. Capital project funding could 
be reallocated for this purpose. In addition, the Wharf area in general needs 
some long term maintenance and capital improvements. 

Needed maintenance and capital projects at the Ferry Building Complex have 
been deferred, since they were to be completed as port of the 1980 agreement 
with a private developer to refurbish the Complex. For example, the World 
Trade Club decided in 1980 that it would not be cost effective to modify its 
electric service and purchase power directly from Pacific Gas and Electric (the 
World Trade Club still purchases power from the Port) since the service was to 
be modified as part of the refurbishing of the Ferry Building Complex. 
However, the Port recently terminated the 1980 agreement and is beginning to 
make improvements to the Complex. For instance, the Port is now repairing 
sewers lines at the Ferry Building at a cost of $135,000 and has identified the 
need for roof and electrical repairs.^ In addition, the Port reported to the Board 
of Supervisors in July, 1985 that it estimates annual losses of greater than 
$500,000 in rental income annually because the Ferry Building has not been 
rebuilt. Capital project funding dedicated to projects with unsubstantiated need 
could be used instead for projects at the Complex, 



BOARD OF SUPERVISORS 



- In a rep>ort concerning the City's infrastructure issued in November, 1985, the 
Chief Administrative Officer estimated that the Port's facilities have a value of 
$1.0 billion, require annual maintenance of $8.3 million and requires $200 
million in capital spending ($20 million per year for ten years). No plans have 
been developed for this capital sF>ending program. 

- The Port does not have a regular schedule of building inspections for its 
facilities which would identify problems requiring major capital spending. Such 
an insF>ection process could be develop)ed by staff to identify Port capital needs. 

The Port does not have a comprehensive plan to upgrade and improve its facilities 
used for non-shipping uses. Such a plan, including a timetable for implementation, is 
needed to insure that the Port's facilities can continue to be safe, modern and 
marketable. 



CONCLUSIONS 

The Port has an ambitious program to modernize its cargo-handling shipping 
facilities in the hopes of capturing increased container shipping traffic but has not 
been as ambitious in developing its commercial properties which are needed to 
produce revenue. The Port has plans to spend another $1 million to rebuild an 
existing crane and has reallocated $4 million originally planned for tunnel 
modifications to be expended for more cargo handling improvements. The spending 
of this money is not required at this time and should be deferred. This $5.0 million 
plus new revenues identified in this report could be used to support other revenue- 
producing Port capital projects. 

RECOMMEmATION 

We recommend that the Port defer the proposed $1 million expenditure to 
rebuild its own crane and to defer approximately $4 million reallocated for other 
cargo handling improvements and instead reprogram these bond fund monies, in 
accordance with the original purposes of the bonds, for other needed Port revenue- 
generating capital improvement projects which would protect the interests of the 
bond holders. 



SAVINGS/BENEFIT 

The Port would benefit from needed capital improvements to existing 
facilities while deferring expenditures for new facilities that are unnecessary at 
this time. 



BOARD OF SUPEFtVISORS 



BUDGET ANALYST 3 ^ 



SECTION 11.2: AUDITS OF SHIPPING LINES AND TERMINAL OPERATORS 



ALTHOUGH ThE PORT WHARFINGERS CONDUCT 
AUDITS TO VERIFY WHARFAGE STATEMENTS, 
THEY DO NOT REVIEW EITHER THE PORPS 
BILLINGS AND LEASE AGREEMENTS OR THE 
SHIPPING LINES' AND TERMINAL OPERATORS' 
PAYMENT AND RELATED ACCOUNTING 
RECORDS. AS A RESULT, THE PORT HAS 
INSUFFIQENT DATA TO DETERMINE WHETHER IT 
IS RECEIVING THE CORRECT AMOUNT OF 
REVENUES WHICH IT IS OWED FROM THE SHIPPING 
LINES AND TERMINAL OPERATORS. 

The Port has developed revenue sharing agreements with shipping lines which 
include provisions that return an increasing proportion of the rent charged by the Port to 
the shipping line as the number of containers brought to the Port by the shipping line 
increases. Seventeen shipping lines now have such agreements valued at $5,296 million. 
The Port also has agreements with shippers that do not involve revenue sharing for a 
total of $2,493 million. 

The Accounting Department of the Finance and Administration Division is 
responsible for maintaining the accounting records of cargo movements and revenue 
collection. However, shipping line and terminal operator payments are not audited by 
the Finance and Administration Division or the Port's outside financial auditors. 

Among their duties, the Wharfingers are responsible for monitoring the physical 
loading and unloading of cargo between ships and piers. They keep records of loading and 
unloading, wharfage, dockage, and demurrage using information provided by the ship's 
manifest. The Wharfingers are also responsible for auditing these records to determine 
the accuracy of the shipping lines' wharfage statements and for comparing them to the 
records kept by the stevedore companies for consistency. 

The Port's Chief Wharfinger reports that his staff had planned to audit wharfage 
statements of ten shipping accounts this year. (According to the Fiscal Year 1 985-86 
budget, the goal was 15 audits.) To date, however, the Wharfingers have only been able 
to audit three accounts because of workload requirements and the absence of one 
Wharfinger due to illness. In these audits, the Wharfinger's staff did find errors that 
increased the Port's revenue by small amounts. 

The audits conducted by the Wharfingers are not considered financial audits in that 
they do not include reviews of the Port's lease agreements and billings or the shipping 
lines and terminal operators' payments to the Port and related accounting records. The 
current lack of financial auditing means that the Port cannot be sure that it is receiving 
the correct revenue from shipping lines and terminal operators. Financial audits 
performed under the supervision of the Controller's Internal Audit Division could verify 
the accuracy of billings and actual revenue collection in addition to the accuracy of the 
wharfage statements. 

The Port of Oakland has had an internal auditing staff in its Finance and 
Administration Division since 1979, consisting of four employees who concentrate their 
efforts on shipping lines and terminal operators, although they also audit commercial 
percentage of gross receipts contracts throughout the Port of Oakland. These rigorous 
audits have discovered millions of dollars of revenue for the Port of Oakland and they are 



BOARD OF SUPERVISOF^ 



BUDGET ANALYST 



considered to be on integral, valuable Port function. In 1982 alone, the Port of Oakland's 
audits of all contracts uncovered over $550,000 in unpaid revenues, approximately 
$391,000 of which were due from shipping contracts. These unpxiid revenues constituted 
approximately 1.6% of the Port of Oakland's total shipping revenues for 1981-82. Audits 
of revenue sharing agreements continue to uncover significant amounts of unpaid 
revenues for the Port of Oakland. For fiscal year 1985-86, audits have revealed that the 
Port of Oakland should have received an additional $134,544 in revenues through January 
1986, or approximately $270,000 on an annual basis. The cost of these audits, averaging 
between $175,000 and $200,000 annually, is significantly less than the unpaid revenues 
they have discovered. 

The Port of San Francisco does audit the 74 commercial tenants that pay revenues 
on a gross receipts basis by a contract with an outside auditing firm at a cost this year of 
$25,000 for auditing 25 of these tenants. As part of their rental agreement with the 
Port, each of these tenants is audited every three years and some are audited more 
frequently. These audits have discovered errors, corrected mistakes in tenant rents and 
made Port tenants aware that they would be regularly audited, thereby encouraging 
tenants to comply with the agreement and maintain detailed records. The Port of San 
Francisco could be assured that it was receiving revenues due to it from shippers by 
similarly auditing its shipping contracts. If the San Francisco Port were able to uncover 
unpaid revenues of the same proportion to its total shipping revenues as the Port of 
Oakland did in 1981-82, it would receive an additional $83,000 per year in revenues. 

The recommendations of the City's Task Force on audits (Advisory Committee on 
Audits and Agreements) should be followed such that all audits would be centralized 
under the Controller's Office and the Controller would establish audit guidelines. 

CONCLUSION 

Full audits of the payments made by shipping lines end terminal operators, 
including reviews of the Port's lease agreements and billings and the shipping lines' 
and terminal operators' payments to the Port and related accounting records, are 
not performed by the Port. As a result, the Port does not know if it is receiving 
accurate payments from shipping lines and terminal operators. 

RECOMMENDATIONS 

The Port should comply with the recommendations of the City's Advisory 
Committee on Audits and Agreements by having full audits conducted of shipping 
lines' and terminal operators' jxiyments. These audits should include both a review 
of the Port's lease agreements and billings and a review of the shipping lines' and 
terminal operators' payments to the Port and related accounting records. 

SAVINGS/BENEFITS 

The Port would benefit from regular audits of the records of shipping lines 
and terminal operators through possible increased revenues resulting from such 
audits. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 3^" 



SECTION III 
COMMERCIAL PROPERTY 



BOARD OF SUPERVISORS 
BUDGE I ANALYSI 

-39- 



SECTION III. I: DURATION OF LEASES VERSUS LICENSES 



IN LIEU OF AWARDING LEASES, WHICH IN SOME 
INSTANCES REQUIRE THE USE OF COMPETITIVE 
BIDDING UNDER THE PORPS PROCEDURES, THE 
PORT HAS CHOSEN TO AWARD 415 LICENSES TO 
CERTAIN TENANTS. WHILE THESE LICENSES CAN 
BE TERMINATED BY EITHER THE PORT OR THE 
TENANT UPON 30 DAYS WRITTEN NOTICE, IN 
FACT THE PORT HAS PERMITTED NUAAEROUS 
LICENSES TO REMAIN IN EFFECT FOR YEARS. 
THESE LICENSES ARE PRESUMED TO HAVE BEEN 
RENEWED EVERY 30 DAYS IF NEITHER THE PORT 
NOR ITS TENANTS TAKE ANY ACTION TO 
TERMINATE THE LICENSES. SINCE THESE 
LICENSES, IN CONTRAST TO LEASES, ARE 
AWARDED BY THE PORT WITHOUT UTILIZING ANY 
COMPETITIVE BIDDING PROCEDURES, THE PORT 
CANNOT BE ASSURED THAT IT HAS MAXIMIZED 
ITS REVENUES FROM THESE TENANTS. 

When the property at the Port of San Francisco was transferred in trust from the 
State of California to the City of San Francisco in 1969, many of the Port's facilities 
were already occupied by tenants who had license agreements with the State. One of the 
Port's first tasks was to develop new agreements between these tenants and the Port. 
This effort resulted in a number of long-term leases for tenants in the Fishermans Wharf 
Zone and thirty-day licenses for a wide variety of Port facilities in all areas of the Port. 

As time passed, more leases and licenses were approved, some tenants with leases 
received additional space through a second lease and/or additional license(s), and licenses 
were transferred from tenants to their successors. Other changes affecting Port tenants 
include the development of new facilities by the Port and developers selected by the 
Port. Various governing bodies have approved changes to laws and regulations. The Port 
now has a significant variety of agreements for the use of Port facilities, resulting in a 
heavy administrative workload for the Commercial Property Department staff. The 
major Port staff currently manages approximately 532 leases, compared to fewer than 
300 major leases managed by all other San Francisco City departments combined. 

Long-Term Leases 

The Port approved leases with a number of tenants in 1970 for a sixty-six year 
duration and with other tenants in 1975 for a sixty-one year term. Currently, of the I 17 
leases managed by the Commercial Property Department, 19, or 16.2 percent, are for 
either sixty-one or sixty-six year terms. None of these leases expire until the year 2036, 
fifty years from now. As a result, the Port has effectively lost control over the use of a 
significant amount of its property until the year 2036, when all of these leases can be 
renegotiated or terminated. In the meantime, the Port does not have the option of 
converting these properties to more profitable or more desirable uses. In the future, the 



If a lessee is grossly negligent or wishes to amend their lease, the Port does hove 
the opportunity to renegotiate the lease at an earlier date. 



BOARD OF SUPERVISORS 



6U0CET ANALYST 
-40- 



Port could generally limit its leases to generally ten years. The Commercial Property 
Department staff would then be able to evaluate alternative potential uses for each 
facility before the lease F>eriod is completed in order to determine whether continuing 
the lease would promote the best use of each facility. Staff could prepare a report for 
the Port Commission that would include recommendations for the use of the facility 
after the existing lease expired. 

Short-Time Licenses 

The Port's ^15 licenses can be terminated by either the Port or the tenant upon 
thirty days written notice. However, licenses are presumed to be renewed every thirty 
days if neither party takes action to end them. Many licensees have occupied their 
present locations for numerous years effectively precluding other potential tenants from 
using the space. As just one example, sixty current licenses have been in effect since 
1 978 or before. 

The following represents examples of tenants which have been operating on Port 
premises, under a 30-day license, since 1976 or before: 

Name of Tenant Year License Issued 

Granex Corp. 1969 

Pacific Bell 1969 

Spolter, McDonald & Mannion 1975 

Woods, Jack and Associates 1975 

Marine Exchange 1975 

John Stanley Horn, Co. 1976 

Exposition Fish Grotto 1976 

Christy Truck Lines 1976 

P. J. Rhodes & Co. 1976 

Mobil Oil Corp. 1976 

U. S. Department of Interior 1976 

The following represents examples of tenants operating on Port premises, under a 
30-day license, which has been awarded in the past six months: 

Western Rim Company 
Exploration Cruises 
Landor Associates 
Pacific Far East Lines 
Valley Engineers, Inc. 
Walter Allen Construction 
Southwest Marine of S. F. 
Hornblower Yachts, Inc. 
Pier 45 North Beach Star 

At least nine of the 415 tenants who have only a thirty day license pay rents of 
over $100,000 per year each for space that could be vacated upon thirty days written 
notice. These nine licensees include: 



The major exception to this restriction would be development contracts, which 
could be let for longer in order to allow completion and amortization of development 
projects. 



BOARD OF SUPERVISORS 

BUDOil ANALYSI 

-41- 



Metropolitan Parking Corp. 
Landor Associates (Two Licenses) 
Hornblower Yachts (Three Licenses) 
Service Engineering (Three Licenses) 

California State Department of Corrections (Four Licenses) 

Fisherman's Wharf Restaurant (Two Licenses) 

Burger, Helen 

H & H Ship Service Co. 

Esprit Corp. 

The practice of granting thirty-day licenses by the Port has resulted in not putting 
certain land and facilities out to competitive bid. Further, such licenses are not subject 
to approval from the Board of Supervisors even though they may remain in effect for 
over ten years or result in revenues of over $1 million to the Port. 

The Port must carefully evaluate decisions to pay for site improvements for "long- 
term" licensed facilities because the tenant might leave before the Port has collected 
sufficient rent to pay for these improvements. Facilities that have been let under 
license for many years have thus remained unimproved. Similarly, even though the Port 
may offer a tenant rent credits for tenant financed improvements to Port property, 
tenants are reluctant to accept this offer because the are not assured that they will be 
allowed to remain at the site long enough to amortize the cost of the improvements. As 
a result, the Port has had significant difficulty attracting and retaining office tenants. 
There are high vacancy rates in Port office facilities because many tenants have recently 
left the Port. Port staff concur that available Port office facilities are difficult to rent 
and often remain vacant longer than would be necessary if short term leases, rather than 
30 day licenses, were offered to tenants. High vacancy rates result in lost revenues and 
an increased workload for staff in the Finance and Administration Division who must 
interview potential tenants, verify credit stability, establish new tenant accounts and 
maintain tenant files. 

Rental of office spKice in the Ferry Building Complex exemplifies the difficulties 
which thirty-day licenses present for the Port. In 1 980, the Port approved an agreement 
with a private firm to rebuild the Ferry Building Complex. The firm did not produce 
appropriate plans and could not obtain the necessary permits required by regulatory 
bodies and, after many extensions to the original agreement, the Port canceled the 
agreement in December, 1985. The Port filed suit to ask the Court to determine that the 
Port's action was proper. The comp>any has cross-complained against the Port and, as 
yet, the matter has not been heard in court. Because of the ongoing instability of the 
Ferry Building renovation project, the Commercial Property Department until recently 
has only been willing to offer thirty-day licenses to potential tenants, in the belief that a 
lease would further complicate the proposed renovation project. Potential tenants do not 
know if and when renovations will occur, or how much notice to vacate they will 
receive. The expected result for Port staff has been difficulty in renting the availc^g 
space; office spxice in the Ferry Building is currently twenty-five percent vacant. 



It is important that the problems of the reconstruction of the Ferry Building 
Complex be resolved as expeditiously as possible so that the deterioration of facilities 
will be ended, short-term maintenance, duplicative of planned project work, will not be 
done and the Commercial Property Department staff can plan for long-term use of the 
facilities. Port staff should be prepared to offer a new proposal to potential developers 
as soon as the litigation is completed. 



BOARD OF SUPERVI SORS 
BUOO^i ANALYST 



The Finance and Administration Division has estimated that more than $500,000 in 
annual revenues have been lost because of vacancies in the Ferry Building due to the 
license-only situation. The Ferry Building licensees could be given leases as long as five 
years with the following provisions: I) if the agreement with the current developer is 
valid and in force, lease agreements with tenants could be terminated with thirty days 
notice; and 2) if the agreement with the current developer is ended, lease agreements 
with tenants could be terminated uF>on six months notice. These termination provisions 
should be sufficient given the long planning and development cycle of the Ferry Building 
Project. According to Port staff, they have already begun to offer similar short term 
leases to potential tenants. 

The use of thirty-day licenses can also result in the Port not from maximizing its 
lease revenues because there is no competitive bidding in the award of these licenses and 
the term of the tenancy is indefinite. No guidelines, rules or regulations exist to aid 
staff for determining whether a license (or expired lease) should be continued or term- 
inated. In general, licenses, which offer little security to either the Port or the tenant, 
could be granted for very short-term uses of sites or for uses that are mobile in nature, 
such as snack trucks. All other licenses could be converted to leases having terms from 
six months to five years. 

Leases and Licenses on Maritime Facilities 

The Port has six planning zones, described in the Introduction. Activities in each 
zone are dedicated to certain activities and other uses are allowed on a conditional basis, 
after approval by the City Planning Commission and BCDC. However, Port staff has 
interpreted existing regulations and the Burton Act to mean that no leases can be given 
to non-maritime uses in three zones dedicated primarily to maritime uses. The Port 
should be able to lease properties in designated maritime zones for non-maritime 
purposes as long as the lease does not constitute a change in the long-term use of the 
land or facility. We recommend that the Port request a written opinion from the City 
Attorney regarding the use of short-term leases for non-conforming use of maritime 
related property, or amend the planning/land use zones to allow these short term, non- 
conforming leases. 

In order to use these areas for non-maritime purposes, Port staff has secured non- 
maritime tenants by issuing thirty-day licenses. Therefore, there are a number of 
tenants with non-conforming uses on maritime facilities, without the necessary condi- 
tional use permits from the Planning Commission. Nevertheless, these tenants will 
probably be able to remain where they are until a long-term maritime use is found for 
their space. In many cases, thirty-day rentals can cause the Port to accept lower than 
market rents for these facilities, because many tenants will not offer market rates 
without the security of a lease. 

Our analysis did not involve a review of the designated long-term uses of any of the 
six planning zones be changed. Such analysis is beyond the scope of this audit. However, 
the present rental situation can be improved in the short term for both the Port and its 
tenants by permitting non-conforming use tenants to operate with short-term leases for 
up to five-years in duration, rather than under a license. We propose that all properties 
to be used by the same tenant for more than six months be let through leases and, in 
conformance with the February, 1986 report of the City's Advisory Committee on 
Agreements and Audits, that those valued at greater than $1,500 per month be let on a 
competitive basis. These proposed leases would have recapture provisions to allow the 
Port to reclaim the facility if it were needed for a conforming use before the end of the 
lease p)eriod. Provisions for the amortization of the cost of improvements would be 
included. 

BOARD OF S UPERVISOR S 
BUDUzl ANALYbl 

-43- 



The new leases would not be automatically renewed after five years, but would be 
subject to the conditions and circumstances that exist upon the termination of the 
lease. For example, the Port may, at the time of the lease renewal, have a higher and 
better use for the land or facility. The six months to five year lease would have 
recapture provisions to allow the Port to reclaim land or facilities for conforming uses as 
called for in the regulations for that planning zone. If the tenant were to be evicted 
from the site or facility, the tenant would receive a refund of an appropriate amount of 
money for tenant-financed improvements that had not been amortized. The tenant would 
also be given adequate notice to move. 

Lease-License Combinqtions 

Many Port licenses are held by tenants who already have a lease, a license, or more 
than one lease or license for adjacent Port properties. The result is duplicative manual 
and computer files, extra work for staff, insecurity for both the Port and its tenants and 
possibly poor decision making based on inaccurate information. In one recent instance, a 
restaurant on Fishermans Wharf was awarded additional space via a thirty day license. 
Although the physical space of the new facility is being treated as a separate facility 
from the existing space, the cost of renting this additional space has been combined with 
the rent of the existing restaurant space. This has resulted in the Port's not having 
maximized its revenues. The Port raised the minimum rent of the restaurant to include 
the rent for the new space. For the last three months of 1985, during a period of slow 
sales, the Port received $7,243 from the minimum rent calculation. Had the Port billed 
this restaurant tenant for this new space separately, the Port would have received $7,699 
through a combination of a percentage of gross receipts plus the flat rent for the new 
facility. If the Port had used this new request for space as a basis to negotiate an 
increase in the restaurant's rent to eight percent of food sales and ten percent of alcohol 
and all other sales (the Port's current rates (see Table I on page 47)) from the present 
5%, 7% and 7%, we estimate that the Port would have received $8,451 in rent. The Port 
used the option that returned the least amount of rental income. It should be noted that 
once seasonal business increases, the restaurant will effectively obtain the use of this 
new facility rent free (gross receipts rent will exceed the current minimum rent). We 
recommend that the Port negotiate with this tenant for the use of this new space. 

Throughout the Port, there are at least thirty-seven tenants who have a total of 
eighty-nine leases or licenses. Port staff are reluctant to amend existing leases to 
include additional licensed space because many of the leases will not expire for several 
years. 

Numerous tenants are occupying Port premises under both leases and 30-day 
licenses. As previously noted, the licenses are simply rolled over forever unless the Port 
or the tenant wants the license to be terminated. Further, numerous tenants have been 
awarded more than one license. 



BOARD OF SUPERVISORS 



BUDCET ANALYST 
-44- 



For example, the following tenants fxive both leases and licenses or more than one 
license: 



Castagnola's Restaurant 
Cresci Bros., Inc. 
Gelardi's Gift Shop 
Guardinos 

Harbor Carriers Inc. 
Harbor Tours 
Isis Imports Ltd. 
Monterey Fish 
Marine Reef 
Patio Sandwich Shops 
Polar Ice 

Sabella and Latorre 
Scoma's 

Service Engineering Co. 
Sinbad's 

Woods, Jack and Associates 

In the future, the Port should consider alternative arrangements in amending its 
leases and licenses and not grant additional s|xice to tenants except under conditions that 
benefit the Port. It should negotiate with the present leaseholders when possible to 
merge the licensed space with the leased space with terms that are acceptable to both 
the Port and the tenant by opening up the lease for renegotiation. The tenant would 
receive the security of one long-term lease instead of many leases and/or licenses while 
the Port would reduce its workload and could increase its revenues. Port staff state that 
they cannot unilaterally renegotiate a lease. This is correct. However, to the extent 
possible, negotiations should take place. If these negotiations are unsuccessful, the Port 
should then consider alternative uses for the land or facility. 

These problems with leases and licenses, combined with the added pressures of a 
poor office rental market, compliance problems, increased recordkeeping, and marketing 
requirements which we have described elsewhere, have resulted in a significant amount 
of additional work for staff. Resolving these lease and license problems would improve 
the operation of the Department. 

CONCLUSIONS 

The awarding of thirty day licenses is not consistent with normal City 
procedures for awarding leases. Because of the continuation of thirty day licenses, 
currently numbering 415, for various Port tenants, with no competitive bidding 
procedures used in the award of these licenses, the Port cannot be assured that it is 
maximizing its tenant revenues. 



BOARD OF SUPERVISORS 
BUDQlI ANALYSl 

-45- 



RECOM^\E^4DATIONS 



We recommend the following changes be made regarding Port leases and 
licenses: 

Except for temporary uses, eliminate licenses for the rental of Port land 
and facilities and instead award short-term leases with a term appropriate 
for the proposed use and facility, using the guidelines recommended by the 
City's Advisory Committee on Audits and Agreements. The leases should 
be awarded on the basis of competitive bidding procedures unless the Port 
can clearly demonstrate it is not practical to do so. 

Attempt the renegotiation of leases with tenants which hold both leases 
and licenses in order to combine the leases and licenses into one lease 
agreement. If such negotiations are unsuccessful, the Port should then 
consider alternative uses for the premises occupied through a license. 

- Generally limit the term of leases for conforming uses to ten years. 
Require that Port staff evaluate alternative uses of each leased facility 
and make recommendations to the Port Commission as to the future use of 
the facility. 

With the assistance of the City Attorney's Office, develop and amend Port 
procedures as required to permit short-term leases for non-conforming uses 
of Port lands and facilities. These leases should include recapture provi- 
sions for the Port and rent credits for tenant financed improvements. A 
conditional use permit might be required from the Planning Commission for 
such a short term lease. 

- Expedite the resolution of the problems with the renovation of the Ferry 
Building in order to avoid unnecessary duplicative maintenance costs and in 
order to prepare for the long-term use of the facility. 

SAVINGS/BENEFIT 

These improvements in the administration of leases and licenses could 
result in an amount of increased revenue to the Port which cannot be fairly 
estimated and would result in more stable rental arrangements between the 
Port and its tenants. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 
-46- 



SECTION 111,2: COMPLIANCE WITH LEASES AND LICENSES 



AS A RESULT OF INCOMPLETE DATA CONTAINED 
IN THE PORT^ 1 17 LEASE AND 415 LICENSE FILES, 
THE PORT DOES NOT KNOW IF ITS TENANTS ARE 
IN FULL COMPLIANCE WITH ALL OF THE 
PROVISIONS OF THESE LEASES AND LICENSES. 
FOR EXAMPLE, IN THE PAST YEAR, THIRTY 
ADJUSTMENTS TO INCREASE RENT, WHICH WERE 
PROVIDED FOR UNDER THE LEASE AND LICENSE 
AGREEMENTS, WERE NOT MADE ON A TIMELY 
BASIS. 

The Commercial Property Department of the Finance and Administration Division 
manages 1 17 leases and 415 licenses of Port property for a variety of commercial and 
other tenant uses. The terms of the leases range from one to sixty-six years, while 
licenses can be canceled with a 30-day notice. The Department maintains both a manual 
and a computer file for each of its tenants. The manual file contains copies of the lease 
or license, correspondence, work p>apers for amending rents and deposits and other 
information as appropriate. The Port's computer is also programmed with tenant 
information, including any special conditions of the lease or license. 

The Port's dual filing systems—manual and computer—are needed because certain 
records such as correspondence, calculations made for rent and/or deposit changes and 
credit checks are not readily adaptable to computer filing. The abstract forms used for 
transferring manually generated information into the Port's computer are comprehensive 
but the computer-generated reports provide only summary information on each tenant's 
account. The manual lease and license files that were in force before the present staff 
managed the Port's files were incomplete and continue to be incomplete. The individual 
Port files lack documentation of tenant insurance coverage, Port Commission 
authorization for rent adjustments and the calculations on which adjustments have been 
based. In addition, there is little consistency in the types of information maintained in 
the files. As a result, staff cannot rely on finding important documents required to 
properly administer the Port's leases and licenses. These files, especially the manual 
files that record actions taken by the Port regarding the tenant, should be brought up to 
date as part of the improvement and use of the tickler system programs described on the 
next page. 

The Port has reviewed and corrected its 117 lease records. The review has 
discovered many problems with the leases, including non-compliance and rent and dep)osit 
adjustments that were either not made at all or not made in a timely manner. The files 
are being brought up to date and are more complete than before the audit was begun. 
Staff was not required to file a report that would describe the problems that were 
discovered, the solutions prop>osed and actions taken. The staff has yet to review the 415 
licenses that are presently active. A survey by the Budget Analyst of the records for 
these licenses discovered incomplete files which left the status of the license accounts 
unsubstantiated. Many files lacked the documentation to support actions taken by 
staff. Judging by the Department's experience with their review of the Port's leases, it 
may require several years to complete a review of all the licenses. In order to speed up 
this essential review, the Department requires an employee on a full-time basis to 
examine the licenses for accuracy and completeness. The Civil Service Commission staff 
recently recommendation approval by the Civil Service Commission of an 1842 
Management Assistant on a full-time temporary basis to assist the full time staff with 
this review at an estimated cost of $23,000 for fiscal year 1986-87. During our exit 
conference with the Director of the Finance and Administration Division concerning this 
report, we were told that the Port will somehow find the resources to complete the 



BOARD OF SUPERVISORS 
BUDGET ANALYST 



review of the Port's licenses before the end of June, 1986. Whenever the Port completes 
the review, this temfXircry position would not be needed. 

It should be noted that the contents of the licenses files, that have become active 
since the current staff began to administer the Department's programs, are improved and 
the files are more complete compared to previous files. According to the City 
Attorney's Office, the current basic license document should be rewritten to bring it into 
compliance with current state and local laws, current practices, and other 
requirements. Developing a new license document could proceed concurrently with the 
review of all licenses. However, we have recommended in Section III. I the replacement 
of many of the licenses with leases and the renegotiation of leases having associated 
licenses. While it takes both the Port and its tenant to approve a renegotiated lease, in 
some instances, because of the tenant's request for additional space, such renegotiations 
are possible. 

Tickler Systems 

The leases and licenses managed by the Commercial Property Division often have 
special conditions which must be acted upon at sp>ecified times. Such conditions involve 
insurance requirements, adjustments to the minimum rent, adjustments to percentages of 
gross receipts, increases in deposits, timetables for capital improvements and 
termination of agreement dates. These lease and license conditions number in the 
thousands and are referenced in both the manual and computer files. These computer 
files could be used to provide the required data (what is to be done, when, percent or 
dollar change, etc.) by use of a tickler file (also called a reminder file) which would alert 
the Port when action on a particular lease needed to be taken. 

The means by which staff can be reminded at the proper time to take certain 
action previously agreed to be taken is called a tickler. For example, a tickler file would 
be organized by date and the user would note on each day the action required that day. 
The Commercial Prof)erty Department has a tickler file, but the Port staff does not 
utilize this tickler system to take timely action required by the leasing or licensing of 
any of its other properties. The execution of the lease or license conditions generally 
depends upon the memory of the Assistant Property Managers. Port staff report that 
many lease and license conditions have either not been executed or are not executed in a 
timely manner. In the past year, the Commercial Property Department has retroactively 
made thirty upward adjustments to tenant accounts because the staff did not take timely 
action to apply appropriate CPI or other rent increases. Better utilization of a tickler 
system would allow Port staff to execute the conditions of the Port's leases and licenses 
in a timely manner. 

The Port's compliance problems cross departmental lines. Many of the compliance 
problems concern construction, repairs and maintenance of Port facilities by Port 
tenants that require City Planning approval, building permits from the Port and the 
inspection of construction. For example, a number of tenants at Fishermans Wharf with 
long term leases were required to submit working drawings by 1980 to improve the Port 
facilities they lease but, according to the Port staff, the Port has incomplete records 
which would indicate that these improvements have been made and therefore, these 
Fishermans Wharf tenants may not be in compliance with their leases. This potential 
compliance problem was discovered during the review of the Port's lease files by staff. 
These tenants have been notified of the possible compliance problem but no other actions 
have taken place at this time. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 



Based on our discussions with the Executive Director concerning these findings, the 
Executive Director has directed his staff to begin improvement and use of tickler 
systems more effectively. 

CONCLUSIONS 

The Commercial Property Department maintains manual and computer filing 
systems and is just completed a review of the Ports' leases. However, the 
Department has not used the Port's computer to its fullest capability. Further, the 
Port's 415 active licenses have not been updated and the license document Is not 
consistent with the legal requirements. As a result of incomplete file data, the 
Port does not know if tenants are in full compliance with all of the provisions of 
the Port's leases and licenses. 

RECOMAAENDATIONS 

We recommend that the Port expedite the review and update of its 415 
license files. We further recommend that Commercial Property Department staff 
work with the Data Processing Department staff to improve and use tickler files 
more effectively. We also recommend that the Commercial Property Department 
staff work with the City Attorney's Office to develop a license document that 
conforms with current law and current practices. 

SAVINGS/BENEFITS 

Better use of tickler files and the Port's computer capability by the 
Commercial Property Department would enable the Port to benefit from a better- 
managed Commercial Property Department with lease and license amendments 
being made on a timely basis with proper documentation. 



BOARD OF SUPERVISORS 



BUDGET ANALYST f 



SECTION IIL3; LEASE ADJUSTAAErsfTS FOR RESTAURAKT TENAh4TS 



UNDER THE EXISTING PROVISIONS OF THE PORT'S 
LEASES WITH SOME OF ITS RESTAURANT 
TENANTS, THE PORT IS ENTITLED TO ADJUST 
THESE TENANT RENTS BASED ON AMENDING THE 
PERCENTAGE OF GROSS RECEIPTS EVERY FIVE 
YEARS. HOWEVER, THE PORT HAS NOT ADJUSTED 
THESE LEASES FOR EITHER OF THE FIVE-YEAR 
PERIODS BEGINNING IN 1980 AND IN 1985. BY 
FAILING TO ADJUST TENANT RENTS IN 1985 AND 
1980, THE PORT HAS LOST ESTIMATED REVENUES 
OF AT LEAST $675,000 FROM THEIR RESTAURANT 
TENANTS. INCREASING RENTS TO ITS 

RESTAURANT TENANTS, IN ACCORDANCE WITH 
THE PORT'S LEASE PROVISIONS, WOULD RESULT 
IN ESTIMATED INCREASED REVENUES TO THE 
PORT OF AT LEAST $380,000 ANNUALLY. 

In 1975, the Port entered Into leases with a number of restaurants in the 
Fishermans Wharf Zone for sixty-one years, until the year 2036. The 1975 leases have 
clauses which permit adjustments to the rent. One clause permits a change in the 
minimum flat rental rate. This adjustment is calculated by applying the percentage 
change in the Consumer Price Index for the preceding five year period to the minimum 
flat rental rate. The Port staff has generally mode these adjustments to restaurant 
leases in a timely manner. 

Another clause permits a change in the percentage of gross receipts paid to the 
Port as part of the rental. Under the 1975 leases, the Fishermans Wharf restaurants 
agreed to pay the Port five percent of their revenue from food sales, seven percent of 
their revenues from alcoholic beverage sales and seven F>ercent of all other revenues, less 
the minimum monthly base rent paid by the restaurant. If the minimum monthly rent is 
greater than the amount computed by the gross receipts method, the restaurant only pays 
the minimum rent. 

Adjustments to these percentage of gross receipts rates may be made every five 
years based on a Port survey of the percentage of gross receipts paid by non-Port tenant 
restaurants in the vicinity. The Port can adjust the percentage of gross receipts paid by 
Port tenants based on change in the percentages being charged to these other 
restaurants. Unfortunately, consideration was not given to the strategic location of the 
Fishermans Wharf restaurants which gives them a significant advantage over other 
restaurants in the area but not on the Wharf. If the restaurant lease holder does not wish 
to pay the new rate, it may terminate the lease with the Port within the next six months, 
but must pay the Port the new rent until the lease is terminated. 



Sixty-six years is the longest term permitted for Port leases by the Burton Act 
which transferred the Port lands to the City in Trust. See Section III. I for a discussion 
and recommendation regarding lease terms. It appears that the term of these 1975 
leases was set at sixty-one years in order that they would expire at the same time as the 
66 year leases that began in 1 970. 



BOARD OF SUPERVISORS 



BUDGE I ANALYSI 
-50- 



Although the Port had entered into twenty of its leases with restaurants by 1975, it 
has since entered into twenty-four additional restaurant leases with rents based on a 
percentage of gross receipts. As the demand for space on Port property has increased, 
the Port has been able to ask for higher minimum rents and percentages of gross receipts 
from restaurants. The increase in percentage of gross receipts is shown in Table I below: 

Table I 

Change in Percentage of Gross Receipts Paid to the Port 

Range of Percentages of Gross Receipts 





Number of 








Restaurant 


Year Leas** Sinned 


Rfstnt irnnts 


Food 


Alrohol 


All Other 


PnrUnn 


1970 


12 


5 


6.5 


6.5 


65 


1974 


1 


6 


8 


N/A 


N/A 


1975 


7 


5-7 


7-8 


7-10 


N/A 


1976 


3 


5-^ 


7-8 


8-10 


N/A 


1977 


3 


6 


8 


10 


N/A 


1978 


4b 


6-8 


8-10 


10-12 


N/A 


1979 


lb 


8 


10 


10 


N/A 


1980 


4b 


8 


10 


10-12.5 


N/A 


1981 


2 


8 


10 


10 


N/A 


1982 


1 










1983 


2 


10 


10 


lOa 


N/A 


1984 


lb 


7 


7 


7 


75 


1984 


3c 


8c 


lOc 


lOc 


N/A 


aqe increase 1 970 to 1 984 60 


53.8 


53.8 


15.4 





(5, 6.5, 6.5 to 8, 10, 10) 

a Modified Gross Receipts 

b Includes some 30-Day Licenses 

c Sixty six year Leases - S. F. Redevelopment Agency 

The Commercial Property Department did not conduct a formal survey in 1980 as 
called for in these leases, but rather, it made an informal survey of some of the 
restaurants in the adjacent area and found that four of the eight restaurants surveyed 
paid their landlords a significantly higher percentage of gross receipts than that paid by 
the subject Port restaurants. This survey did not show changes experienced by restaurant 
tenants in the percentage of gross receipts as provided for in the leases. The survey only 
showed the prevailing percentage of gross receipts rates. Nor did the survey include 
many restaurants that could have been surveyed. Based on the Port's informal survey, 
the Department decided that Port tenants would be at a competitive disadvantage with 
other restaurants in the area if rents of the Port's restaurant tenants were increased. 
Therefore, the Department recommended to the Port Commission against increasing the 
percentage of gross receipts rent for these restaurants, and no action was taken. 



BOARD OF SUPERVISORS 



fiUDCET ANALYST 

-51- 



However, as can be seen from Table I, the Port already had agreements with 
restaurants by 1980 wherein the restaurants were paying rent to the Port based on 8% of 
food receipts, 10% of revenues from alcoholic beverages and 10% of other sales in 
contrast to leases still in effect from 1975, wherein the lessees ore paying 5 to 7% on 
food receipts, 7 to 8% on alcohol beverages and 7 to 10% on other sales. There have 
been no failures of restaurants which pay the higher percentage of gross receipts to the 
Port indicating that the current percentage of revenue charges by the Port are not 
excessive. A more rigorous survey of the adjacent restaurants may have found these 
higher rates also being paid by restaurants in the survey area that ore not tenants of the 
Port. Since 1980, other restaurant leases could also have been increased to 8%, 8% and 
10%. Based on Accounting Department data of actual rents paid by the Port restaurant 
lessees, if the gross receipts percentages for these leases were adjusted in 1980 (and 
subsequent to 1980 as restaurants leases became eligible for adjustment) to eight 
percent, ten percent and ten percent of food, alcohol, and other revenues, respectively, 
we estimate that the Port would have received an additional $390,000 in revenue. 

For example, no increase in the percentage rents was made in 1985 for the 
following four restaurants: 

Fish Alley Bar & Grill 

Franceschi's 

Pompei's 

Scoma's 

Although the leases of these four restaurants, which were awarded in 1974 and 1975, 
contain provisions for rent adjustments, the Port, to date, has never increased the rental 
rates payable by these restaurants. 

While the Port reports that it did make a detailed survey in September and October 
of 1984, the rents for eligible restaurants were not adjusted at that time. In accordance 
with the provisions of the leases, the percentage of gross receipts received from these 
restaurant leases could have been adjusted in 1985 in addition to 1980 but they were not 
so adjusted. The Commercial Property Department did not make a survey in 1985 and, 
subsequently, has not surveyed nearby establishments. As a result, no adjustments to the 
percentage of gross receipts paid by these restaurants have been made. Using the same 
criteria of rents paid under recent leases of the Port's own restaurant tenants of eight 
percent, ten percent and ten percent, we estimate that the Port has lost revenue 
exceeding $285,000 between April, 1985 and December 1985 as a result of not making the 
survey of non-Port tenant restaurants. On an annualized basis, the Port is losing at least 
an estimated $380,000 per year by not having adjusted these rents. The Port can still 
conduct the survey, adjust rents as appropriate and collect delinquent rent. The Port 
should immediately conduct this survey with present staff. A survey of between twenty- 
five and fifty restaurants in the adjacent area would gather a sufficient amount of 
comparative data and could be easily carried out with existing Department staff. 

CONCLUSION 

Although the provisions of the Port's leases with restaurants entitle the Port 
to adjust rents in order to increase revenues, the Port has not made such 
adjustments to rents paid by certain restaurant lessees in either of the five-year 
periods beginning in 1980 and in 1985. As a result. Port has lost estimated revenues 
of at least $675,000. 



BOARD OF SUPERVISORS 



BUlXtl ANALYSI 

-52- 



RECOMMENDATIONS 



We recommend that the Port conduct the survey provided for under its lease 
provisions in order to obtain increased rents from its restaurant tenants. 

SAVINGS/BENEFIT 

Adjusting the restaurant leases to current Port standards of 8%, 10% and 10% 
would result in increased rent to the Port of at least an estimated $380,000 
annually. 

Note: In response to our audit, the Port reports that it is currently conducting the 
survey as we recommend. 



BOARD OF SUPERVISORS 
BUDGET ANALYST _ 



SECTION III.4: LEASING OF PORT FACILITIES 



THE COMMERCIAL PROPERTY DEPARTMENT HAS 

NOT AGGRESSIVELY ATTEMPTED TO LEASE THE 

PORPS COMMERCIAL, INDUSTRIAL AND OTHER 

SPACE. AS COMPARED TO A CITYWIDE VACANCY 

RATE OF APPROXIMATELY 13.4 PERCENT FOR 

OFFICE SPACE, THE PORPS VACANCY RATE FOR 

OFFICE SPACE MANAGED BY PORT STAFF, IN 

CONTRAST TO THE PORPS OFFICE SPACE 

MANAGED BY OUTSIDE DEVELOPERS, IS AN 
ESTIMATED 23.6 PERCENT. AS A RESULT OF VERY 
LIMITED MARKETING ATTEMPTS TO LEASE VACANT 
PORT FACILITIES, WE ESTIMATE THAT THE PORT 
HAS LOST AT LEAST $298,800 IN LEASE REVENUES 
DURING THE PAST YEAR FOR JUST TWO VACANT 
OFFICE BUILDINGS LOCATED AT PIER 27/29 AND AT 
PIER 94/96. BY DEVELOPING A SOUND MARKETING 
PLAN, WE ESTIMATE THAT THE PORT COULD 
INCREASE ITS PROPERTY RENTAL INCOME BY AT 
LEAST $375,828 ANNUALLY. 

The Commercial Property Department of the Finance and Administration Division 
administers tenant leases and licenses, monthly parking space rentals, metered parking 
spaces, and electric service accounts. The Department also provides day-to-day services 
such as facility cleaning, repairs, and maintenance. It contracts for security services and 
it markets commercial properties for the Port. The Department employs a Property 
Manager, three Assistant Property Managers, two clerks, a secretary, a maintenance 
coordinator and parking meter staff. 

CommerciQl Office Space 

Until 1981, the Port believed that it had little need for a commercial marketing 
effort (see Glossary on page 69 for our definition of Marketing) There was then little 
competition for tenants. City vacancy rotes were less than one percent and there was a 
shortage of office space in the City. The high demand for office space allowed for 
monthly rental rates from $2.00 to $2.50 or more per square foot in the downtown area, 
depending upon the location, term of the lease and the amenities of the property. During 
this period, the Port had a waiting list for office space and a large portion of the Port's 
industrial property was occupied. 

Since 1981, many large office buildings have been completed in the downtown area 
adding millions of square feet of office space to the existing stock. With the increase in 
available office space over the past five years, downtown office space vacancy rates 
have increased to 13-4 percent as of December 31, 1985 according to Coldwell Banker, 
and there has been a downward pressure on office rental rates throughout the downtown 
area including the Port. Now landlords must compete for tenants. With a reasonable 
marketing effort the Port should be able to be very competitive in the commercial office 
space market. However, the Port does not have a marketing plan to compete in the 
office rental space market. Therefore, the Port's vacancies currently include at least 
twenty five percent of the Ferry Building, plus three empty office buildings and other 
vacant office space totaling 72,542 square feet. We estimate that the Port's vacancy 
rate is approximately 23.6 percent. This analysis of the vacancy rate for Port managed 
office space does not include those Port offices that are not managed directly by the 
Port staff, such as the Roundhouse. 



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BUDGET ANALYST 

-54- 



Two Port office buildings have been vacant for more than one year. One building, 
located at Pier 27/29, is an I 1,000 square foot office building located in the Maritime 
Reserve Zone. Some minor renovations would be required to make this space suitable for 
tenants. The Assistant Property Manager states that she has not had time to adequately 
advertise this I 1,000 square foot office space but she estimates that it could have been 
rented last year for about $1.50 per square foot per month, or $198,000 per year if 
properly marketed. The Port staff estimates that a total of $75,000 ($55,000 in tenant 
improvements and $20,000 for handicap access requirements) in improvements to this 
office building would have to be made for it to be leasable. The net to the Port for 
leasing this office space for the past year would have been at least $123,000, while total 
revenues for the term of a five year lease would have been $915,000 ($990,000 minus 
$75,000). 

The other building is located at Pier 94/96 and is a 12,000 square foot office 
building located in the Southern Waterfront Zone. Some minor renovations would be 
required before the building could be rented; the cost of these renovations would depend 
upon how many tenants would be located in this building. The office building at Pier 
94/96 has also not been advertised or improved to any extent and it has been vacant for 
in excess of one year. The Commercial Property Department Staff estimated that this 
space could have rented for $.70 per square foot per month (this rate is less than areas 
that are closer to the downtown area or that have better public transportation available 
to tenants), or $100,800 per year. If the Port had invested $1.00 per square foot, or a 
total of $12,000 in improvements to this office space, the net to the Port for the past 
year would have been $88,800. The total rent for a five-year lease would be $492,000 
($504,000 minus $ I 2,000). 

The total rent that could have been achieved in the past year is $298,800 ($198,000 
plus $100,800) minus $87,000 in improvements ($75,000 plus $12,000) for a net of 
$21 1,800. Even in today's competitive market for office space, a reasonable rental rate 
goal for the building on Pier 27/29 would be $1.25 per square foot per month ($165,000 
annually) and for the building on Pier 94y96, $.50 per square foot per month ($72,000) for 
a total of $237,000 on an annual basis. The cost of improvements would still be $87,000. 

A major problem with renting these two facilities is that they are both non- 
conforming uses (office space in a maritime use zone). Under current Port practices, 
this means that if the Port wished to rent either office space to a non-maritime oriented 
company on a long term basis, it would have to change the uses permitted in this zone by 
declaring the facility to be surplus to maritime use (a very long and not necessarily 
successful process). If the potential office renter were in a maritime related business, 
there would be no problem. We have made a recommendation for the rental of non- 
conforming uses of Port property in Section III. I of this report. 

The Port's other vacant office is space in the Ferry Building (presently 25% 
vacant). Agriculture Building and on various piers total an estimated 48,742 square feet. 
We acknowledge in Section III. I on pages 42 and 43 that the agreement to rebuild the 
Ferry Building Complex could be a factor in the difficulty of renting office space in the 
Ferry Building Complex. In our opinion, an aggressive marketing effort by the Port could 
net a composite rate of approximately $1.00 per square foot per month or $584,904 per 
year for this space. Even if the Port were to spend $1.00 per square foot for remodeling 
purposes ($48,742), the first year net would still be an estimated $536,162. While there 
are always vacancies and turnover, the Port should be capable of. keeping most of its 
approximately 310,000 square feet of office space rented, if it had an effective 
marketing strategy. If the Port were to attain the same 13.4 percent vacancy rate for 
office sfxice, the same as the downtown area, it would require the Port securing tenants 
for approximately 31,319 square feet of office spKice, which, in our opinion is very 
reasonable. At a composite rate of $1.00 per square foot space would result in an annual 



BOARD OF SUPERVISORS 



BUDGET Ah4ALYST 



revenue of $375,828. Estimated remodeling of $1.00 per squore foot would reduce the 
first year net revenue to $344,509 ($375,828 minus $31,31 9). 

Indastrial and Ottier Space 

According to the Port's current vacancy report, the Port has a number of vacant 
sites and vacant buildings totaling an estimated 908,109 (434,400 of this space is 
discussed in Section I.I) square feet that could be used for light industrial or similar 
other uses. However, Port staff has not made a major effort to market these areas. We 
also have identified a number of Port sites that are underutilized (see Appendix). Port 
staff has believed that they could not develop leases for non-conforming uses on many of 
their facilities. Although the Port may negotiate with potential tenants for the use of 
Port sites from time to time, there is no formal program to market the great variety of 
Port sites. Such a program, including "short term leases" (leases of five years or less) 
could include a goal of the Port receiving $.20 per square foot or $181,622 annually for 
the industrial sites identified in the Port's vacancy report (not including uses of sites in 
Appendix A). Long term uses for these parcels and buildings are discussed in Section I.I, 
Strategic Planning. 

Marketing 

The Port has a number of facilities and land which could be developed for variety 
of uses. These potential sites are in addition to the projects to be developed by the Son 
Francisco Redevelopment Agency. Development of the sites would require a major, full 
time effort, however. Commercial Property Department staff manage the present 
system of leases and licenses that has been in effect since before the Port was 
transferred from the State to the City in 1969. This system of leases and licenses has 
presented a number of problems that have occupied the staff time (see Section III. 2) and 
prevents them from spending the time necessary for proper marketing of vacant Port 
facilities. As a result, the Port has not effectively marketed its vacant facilities. None 
of the present full time staff has an extensive background in marketing. The 
Commercial Property Department staff agree that a greater marketing effort must be 
made because of the competitiveness of the market place. 

The Port will spend more than $300,000 this fiscal year Including expenses for a 
full-time marketing specialist to promote its shipping services. At the same time, little 
is spent on promoting the Port's non-shipping facilities with the exception of classified 
advertisements for vacant space. The Port does spend money to market specific 
commercial projects, however. 

In our opinion, Port staff should dedicate time to marketing the Port's resources, in 
particular by hiring staff or using the expertise of the Maritime Affairs Division's 
marketing staff, if necessary, to promote and develop a strategy for the use of Port 
property. One additional way to advertise Port land and facilities would be to prepare a 
packet of information describing Port facilities in general and vacant sites in 
particular. This packet could be included with information provided by the Maritime 
Affairs Division to potential shippers around the world as part of the Division's marketing 
effort and could be distributed locally through professional and trade organizations. But, 
marketing means much more than simply advertising that space is available, as the 
definition in the glossary defines marketing. It is estimated that the cost to hire a 
marketing specialist and develop a program would be less than $50,000 annually. 
Alternatively, these funds could also be used to hire an outside firm on an as needed basis 
to market Port properties. The Port has just transferred an intern (who has a Master's 
Degree in Marketing) from its Engineering Department to the Commercial Property 
Department to institute a marketing program. 

BOARD OF SUPERVISOFtS 
BUDGET ANALYST 
-56- 



Computerized Property Inventory 



In order for the Port to improve its commerciol marketing effort, the Commercial 
Property Department must also improve the quality of property information it 
maintains. The Port's computer program and report for tenant accounts (called BIFLICE) 
only has information on current leases and licenses. There is currently no listing for 
vacancies. In fact, when a lease or license is terminated, all references to the tenant or 
facility no longer appear in the Port's printed records. To find vacancies, the 
Department staff rely on a map of Port property and a computer report titled 
BIFVACA. The data from BIFVACA could be combined with the BIFLICE program so 
that an analysis of each site (space occupied and space vacant) could be made from one 
document. 

The BIFLICE program can be readily modified to provide the necessary information 
for an inventory of occupied and vacant Port property. By using the present data input 
document more fully, the Commercial Property staff could create a document that 
provides more helpful information. For example, attached to the "Tenant Name" line 
could be the tag VAC-OFF MRLT. This would signify a vacant office building located on 
maritime- related property. In addition, all vacant property could have a special client 
number that would signify a vacancy and be used as a "sort" option on the computer. 
Other data such as the location of individual facilities and the number of square feet of 
space per facility are readily available by transferring the appropriate information from 
the lease or license just terminated or, for new listings, making estimates at the time 
information is entered into the computer, if the exact information is not known. The 
cost to modify this program to provide the needed data is minimal. This enhanced 
program would assist Port staff with the analysis of individual Port sites. We also 
recommend that the Port staff prepare a report on vacancies of Port property for the 
Port Commission. Such a report would aid the Commission's analysis of the status of 
Port property. 

CONCLUSION 

The Port has a number of facilities that could be rented for a substantial 
amount of revenue. These facilities require varying levels of rehabilitation. A 
concerted marketing effort by Port staff should result in a decreased vacancy rate 
for these facilities. 

RECOMMENDATIONS 

We recommend that the Port make a major effort to lease the two previously 
identified vacant office buildings and other vacant facilities and sites. 

SAVINGS/BENEFITS 

By achieving a vacancy rate for Port office space of 13.^ percent, the Port 
could realize an extra $375,828 annually. Marketing services, estimated to cost up 
to $50,000 annually, should be used to develop a strategy to achieve the revenue 
goals described in the Strategic Planning Section I.I. Additionally, an estimated 
one-time remodeling expenditure of $31,319 would be incurred. 



BOARD OF SUP ERVIS ORS 
BUDGET ANALYST 

-57- 



SECTION IV 
OTHER ISSUES 



BOARD OF SUPERVISORS 



BUUU^I ANALYSI 

-58- 



SECTION IV.I: CHINA BASIN HOUSEBOAT COMMUNITY 



CURRENTLY, THERE ARE 49 BOATS BEING USED 
AS RESIDENCES AND 13 NON-RESIDENTIAL BOATS 
MOORED AT CHINA BASIN. ThE PORT DOES NOT 
HAVE A SIGNED LEASE WITH THE HOUSEBOAT 
COMMUNITY IN CHINA BASIN. THE PORT IS NOW 
RECEIVING AN AVERAGE OF ONLY $12.90 PER 
MONTH FOR EACH BOAT BERTHED AT CHINA 
BASIN, OR A TOTAL OF $9,600 ANNUALLY FOR 
ALL 62 BOATS. A MARKET-FiATE LEASE FOR 
EACH OF THESE BOATS WOULD RESULT IN AN 
AVERAGE RENT OF $264 PER BOAT PER MONTH, 
OR A TOTAL OF $196,800 ANNUALLY. FINALLY, 
THE PORT HAS f^EVER BILLED THE OWNERS OF 
THESE BOATS AT CHINA BASIN FOR EUECTRiCITY, 
RESULTING IN APPROXIMATELY $22,000 IN 
ANNUAL ELECTRICITY COSTS TO THE PORT. 



In 1959, a group of houseboats residents moored at Islais Creek were relocated by 
the Port to the Channel at China Basin, where they continue to reside. The piers at 
Chine Basin where the houseboats are moored had at that time fallen into disrepair. 
There were no sewer hookups or other utilities, and raw sewage was discharged into 
San Francisco's Bay. 

In 1975, based on San Francisco Bay Conservation and Development Commission 
(BCDC) requirements, the Port began eviction proceedings to remove the houseboats 
from the Channel. Based on assurances from the Port that a sewage system would be 
installed, the BCDC issued a permit for these craft to the Port in 1976 and the Port 
assigned this permit to the houseboat community. An agreement for a ten-year lease 
was negotiated between the houseboat residents and the Port, permitting twenty 
houseboats and thirty-five spaces for non-residential boats, but not providing any space 
for what are known as "live-aboard" boats. However, according to the City Attorney's 
Office, the lease between the Port and the houseboat community was never executed. 
The form of the proposed lease has not been approved by the City Attorney's Office and 
has not been signed by either party. 

Lease Uncertainties 

In the proposed lease, the Port agreed to remove dilapidated structures, to 
construct new piers, install water, sewage and electric utilities, to provide amenities 
such as landscaping, toilet and shower facilities, parking Sfxices and to maintain some of 
the new facilities. The tenants agreed to take on certain maintenance and other 
responsibilities and to pay $1,800 rent monthly to the Port (partially adjusted annually by 
the Consumer Price Index (CP!)) for the berths and amortization of the Port's out-of- 
pocket expenses. This rent would be payable when the basic construction was completed 



A "live-aboard" boat is one that is one that is fully navigable and serves as a 
residence. A houseboat, on the other hand, serves as a residence but cannot move under 
its own power. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 
S9 



or in January, 1978, whichever came sooner. Until that time, the tenants agreed to pay 
$A00 per month, which would increase to $800 as facilities were constructed. 

Without a signed agreement, the Port built new piers and installed utilities, 
including a sewage holding tank and pump station. The Port estimated that construction 
of these facilities entailed expenditures of $170,000 that would have been reimbursable 
under the proposed lease as well as non-reimbursable expenditures of $200,000. The Port 
has maintained the facilities since construction but has not kept detailed records of this 
maintenance expense nor has it been reimbursed for the maintenance work it 
performed. The initial rent of $400 per month was raised to $800 per month in 1980 but 
it was never increased to the $1,800 per month level called for in the proposed lease or 
adjusted by the CPI. By not charging the amount permitted in the proposed lease, the 
Port has lost $106,000 in revenues between January I, 1978 and December 31, 1985, not 
including the CPI adjustment for ongoing Port maintenance expenses specified in the 
proposed lease. 

The lack of a lease has also complicated the Port's legal relationship with 
houseboat tenants. For example, the proposed lease between the Port and the Houseboat 
Association specified that twenty houseboats (but no live-aboards) and thirty-five non- 
residential boats could be berthed at China Basin. Currently, there are eighteen 
houseboats, thirty-one live-aboard boats and only thirteen non-residential boats moored 
there. As a result, there are more than twice the number of residences at China Basin 
than the number allowed in the proposed lease, sixty three percent of which are live- 
aboards which were not to be allowed at all under the proposed lease. In the absence of a 
signed lease specifying the number of residences permissible at China Basin, the Port 
Managers do not know if they have the authority to reduce the number of either live- 
aboard boats or residential boats. 

The Mission Creek Harbor Association, which represents the houseboat community 
at China Basin argues that signing the lease is a formality and that the lease is valid 
because it was approved by the Port Commission in November, 1977. The Association's 
Steering Committee asserts that it is prepared to pay the amount called for in the lease 
agreement, but has not been billed for this additional amount by the Port. Subsequent to 
the beginning of this audit, the Port staff and the Houseboat Association have had 
discussions to formulate a lease that would be accepted and approved by all parties. 

Future Revenues 

A BCDC staff report issued in July, 1985 contains statistics indicating that berth 
fees in the Bay Area are as much as $7.50 per foot per month, or $300 per month for a hO 
foot boat, in addition to any rent that would be paid to the owner of the houseboat if the 
houseboat is rented. A survey of Bay berth fees by our office indicates that the average 
houseboat berth fee is $372, while fees for berthing live-aboards and non-residential 
boats range from approximately $200 to $300 per month. If a market rate berth fee of 
$300 per month were charged to the eighteen houseboats at China Basin, the Port would 
receive $64,800 annually. Charging $250 per month to live-aboards and non-residential 
boats would net the Port an additional $132,000 per year. Total China Basin berth 
revenues to the Port would thus total $196,800 annually, or an average of $264 per month 
for each of the 62 boats moored there, compared with the $9,600, or $12.90 per boat, 
earned by the Port in China Basin berth fees in 1 985. 

The Port is clearly not managing its property at China Basin profitably. While the 
facilities at China Basin may not warrant imposition of market rotes, the Port could 
significantly increase the revenues received from the tenants located there. The Port 



BOARD OF SUPERVISORS 



BUDGET ANALYST 



sfx)uld immediately attempt to negotiate a China Basin houseboat lease at the market 
rate. If the Port is unable to negotiate near market rental rates, it could consider more 
profitable, alternative uses for the site. 

Provision of Electricity 

The Port buys electricity from Pacific Gas and Electric (PG&E) and resells it to 
some Port tenants (see Section IV.3). The Port has furnished electricity to the 
houseboats and was to receive revenue from the tenants according to a schedule based on 
actual power used by the tenants during the first year of tenancy at this location. The 
agreement called for sharing electricity expenses between the houseboat community and 
the Port; however, the Port has not billed the houseboat community for any electrical 
power. The cost for this power in 1985 alone was $21,610. The Mission Creek Harbor 
Association's Steering Committee has indicated that tenants would be willing to pay for 
all electricity as PG&E customers while PG&E has indicated that it would be willing to 
accept the conversion of electricity for the houseboats. The Port should require 
houseboat tenants to purchase electricity directly from PG&E. 

Development of A Houseboot Code 

The City of San Francisco does not have a houseboat code, as do Marin County and 
the City of Sausalito. Certain aspects of houseboat codes are unique, such as those 
regulating floatability, and are not reflected in the City's regular building codes. 
Without a houseboat code, the Port is not able to insure that building and safety 
standards pKirticular to houseboats are met. While the Port could include these standards 
in the lease with the Houseboat Association, doing so would make it difficult to amend 
the code other than when the lease is renegotiated. In order to allow maximum 
flexibility in regulating the houseboats at China Basin, the Port should review the 
houseboat codes of other jurisdictions and recommend a houseboat code that would be 
jointly enforced by the City Planning Department and the Port's Engineering 
Department. 

Communication Problems 

Staff of individual Port divisions are not cognizant of the actions of other Port 
divisions concerning the houseboats. The following entities maintain some, but not 
complete, files concerning the China Basin houseboats: the Commercial Property, 
Accounting, Engineering, and Maintenance Departments of the Port, the City Attorney's 
Office, the Mission Creek Harbor Association and BCDC. There is very little overlap 
among these files, but, taken together, the files offered a relatively complete record for 
review. Further, Port staff in one division are not knowledgeable about actions 
concerning the houseboats taken by staff in other Port divisions. The Commercial 
Property Department is fully responsible for maintaining lease files and for collecting 
rents from other Port tenants, and should be given responsibility within the Port for 
maintaining all files concerning the houseboat community. 

CONCLUSION 

The Port received a permit from BCDC to allow 20 houseboats and 35 small 
boats to be moored in China Basin. The Port demolished existing dilapidated piers, 
built new piers, installed utilities and provided electricity and maintenance services 
to the houseboat community. In the absence of a lease, the Port has only received 
a nominal monthly rent for all of these services, at a loss to the Port of at least 
$106,000 to date. In addition, the Port lacks a mechanism to enforce houseboat 



BOARD OF SUPERVISORS 
BUDGET ANALYST ^ / 



standards that ore not addressed in the City codes. Finally, the collection of 
information concerning the houseboats is not well-coordinated. 

RECOMAAENDATIONS 

We recommend that the Port negotiate a market rate lease with the China 
Basin houseboat community as expeditiously as possible or consider alternative uses 
for the site. If the houseboat community remains at China Basin, the Port should 
end its electrical service to the houseboat community and require the residents of 
the houseboat community to purchase its electricity directly from PG&E. We 
further recommend that Port staff review the houseboat codes used by the City of 
Sausaiito and Marin County for applicability to the China Basin houseboats and 
develop a similar code to be enforced jointly by the Port and the City. Finally, the 
Commercial Property Department should be assigned the responsibility for 
maintaining complete files concerning the houseboat community. 

SAVINGS/BENEFITS 

Negotiating a new lease would result in the Port receiving near market rotes 
for berth fees at China Basin or a potential increase in fees of $187,000 annually. 
In addition, the Port would save $22,000 annually by requiring the houseboat 
community to pay PG&E directly for its electricity. Finally, by developing a 
houseboat code, the Port would be able to ensure that houseboats meet reasonable 
building and safety standards. 

Failing to negotiate a market rate lease with the houseboat community, the 
Port would still be able to increase the revenues earned at China Basin by using the 
site for another purpose. 



I 

BOARD OF SUPERVISOF^ 
BUDGET ANALYST /C 



SECTION IV.2: FIREBOAT 



THE PORT EXPENDS OVER $1 MILLION ANNUALLY TO 
SUPPORT THE FIRE DEPARTMENT'S OPERATION OF THE 
FIREBOAT. HOWEVER, BETWEEN 198! AND 1983 Tl-E 
FIREBOAT WAS USED AN AVERAGE OF LESS THAN ONCE 
PER MONTH AND IN 1984 AND 1985 IT WAS USED AN 
AVERAGE OF LESS THAN TWICE PER MONTH TO FIGHT 
FIRES ON VESSELS OR ALONG ThE WATERFRONT. THE 
PORT AND THE FIRE DEPARTMENT ARE IN 
DISAGREEMENT WITH EACH OTHER AS TO THE MOST 
COST EFFECTIVE LEVEL OF FIRE PROTECTION 
SERVICES. GIVEN ThC LEVEL OF EXPENDITURES, THE 
IMPORTANCE OF FIRE PROTECTION AND ThE VARIOUS 
ALTERNATIVES CURRENTLY AVAILABLE, A 
PROFESSIONAL ANALYSIS OF THIS STTUATION BY AN 
INDEPENDENT EXPERT EXPERIENCED IN FIREBOAT 
ACTIVrriES AT OTHER PORTS IS WARRANTED. 

The Port of San Francisco has contributed to the expense of staffing, operating, 
berthing and maintaining the fireboat "Phoenix" on a 24-hour basis since the City took 
over the Port from the State of California in 1969. The vessel is operated by the Fire 
Department of the City and County of San Francisco. The cost of operating the Fire 
Department's fireboat is paid by the Port. The cost of the fireboat operation has 
increased from approximately $350,000 in 1969 to $1,054,956 in FY 1984-85, an average 
increase of 20 percent per year over this fifteen year period. Ninety-six percent, or 
$1,012,000, of the FY 1984-85 costs were for the permanent and temporary salaries, 
holiday and overtime pay and fringe benefits for Fire Department staff positions. Port 
fireboat costs for FY 1984-85 also included approximately $5,000 for fuel and $37,956 for 
maintenance. The fireboat costs represented 4.5 percent of the Port's total operating 
expenses of $24 million in FY 1984-85. 

The fireboat Phoenix is berthed with the San Francisco Fire Department Engine 
Company No. 35, located at Pier 22 under the Bay Bridge. As presently operated, 
there is a one officer and a three member firefighter company employed and funded by 
the Fire Department available to respond to fires in the harbor, on Port property and in 
the downtown areas of the City with fire trucks, pumpers and/or the fireboat. In 
addition, a three-member fireboat crew, employed by the Fire Department but funded by 
the Port, is stationed at Engine Company No. 35, ready to respond to fireboat calls. In 
order to provide 24-hour coverage, ten staff people have been assigned to the fireboat. 

The ten person fireboat crew, comprised of three Lieutenants, one Captain, three 
Marine Engineers and three Pilots, is responsible for the 24-hour operation of the 
fireboat. The Captain has overall responsibility on the fireboat, the Lieutenants 
substitute for the Captain during the alternate shifts, the Pilots are responsible for 
navigating the vessel and the Marine Engineers are responsible for maintaining the 
monitors, fuel flanges, gauges, pressure, generators, firepumps, etc. on the fireboat. The 
fireboat is staffed by three employees at all times. Additional Fire Department 
employees cover necessary vacation and sick tirne for the fireboat staff. The cost of this 
overtime is included in the total cost for fireboat ofDeration given above. 



BOARD OF SUPERVISORS 
BUDGET ANALYST 
^5 



The Port also owns, operates and maintains the "Frank G. White" tugboat, which 
has water pumping capacity and acts as a backup to the Phoenix, when necessary. 

Use of the Fireboot 

The fireboot has six primary functions: 

1. Extinguishing pier and wharf fires and protecting the cargoes therein; 

2. Extinguishing ship and boat fires; 

3. Inspecting piers and wharfs for fire prevention purposes; 

4. Providing an emergency pumping station to supply the Bay's high pressure water 
for fire fighting to all the downtown and industrial areas of the city; 

5. Providing rescue services; and 

6. Providing ceremonial water displays. 

Based upon data maintained by the Port Fire Marshall, there have been 28 large 
pier or wateriPront fires in San Francisco since 1966. Information on the amount of loss 
of structures and contents per fire has been maintained only since 1978. Since that time, 
there have been 19 major fires which left total losses of over $2 million. 

In addition to these major fires, the fireboot may be used to respond to less severe 
fires, rescues and other alarms along the waterfront. Based on the Port Fire Marshall's 
monthly tabulations of all fireboot responses between January, 1981 and December, 1985 
we found that the fireboot responded to on average of 1.22 calls per month requiring an 
estimated 1.77 hours of operation per month. This ecpjols approximately one and one half 
hours per response per month during 1981, 1982 and 1983. Subtracting the number of 
false alarms, rescues and ceremonial uses of the fireboot, the fireboot was used on 
average of 0.8 times, or less than once per month to fight fires on vessels or along the 
waterfront in 1981, 1982 and 1983. Comparatively, in 198^ and 1985 the fireboat was in 
service an overage of^^.S times per month; the average for fire fighting calls only was 
1.8 times per month. When the fireboat is not in service the fireboat remoins at 

the Engine Company, performing maintenance and/or administrative duties. 



These data do not include calls for the fireboat to be on stand-by or instances in which 
the fireboat is recalled bock to its berth because land based engine companies ore used 
instead. 



The Fire Department's response, which is attached at the end of this report, states 
that, according to their Computer Assisted Dispatch system for the period between 
January, 1983 through March, 1986, the Fireboat Phoenix averaged 9.7 emergency runs 
per month; this overage includes fire alarms, rescue colls and standby service. 

» 

BOARD OF SUPERVISOFIS 
BUDGET ANALYST 



Legal Issues and Controversy 



Neither the Burton Act, the agreement transferring the Port to the City from the 
State, nor the City's Charter require the Port to maintain a fireboat with a 24-hour 
marine and fire fighting crew. However, the Transfer Agreement does state, in Section 
VI, that the Port must maintain the same level of fire protection existing at the time of 
the transfer. In 1979, the City Attorney stated that the Port is not required to maintain 
the fireboat if the level of fire services existinq at the time of the transfer can be 
provided in a reasonable fashion by other means. 

The Port and the Fire Department disagree about the continued need for and the 
most cost-effective level of fireboat services. The Port argues that significant changes 
have occurred which decrease the fire risks at the Port. These include both a decrease in 
maritime activity and the shift from exclusive breakbulk to mixed containerized and 
breakbulk cargo; containerization lessens the exposure of the cargo to fire. Thus, the 
increased use of containerized cargo at the Port reduces the risk of fire for the Port. 
The Port has also installed sprinkler systems on numerous piers and structures and 
removed several old fire prone wooden piers. In addition, the Port contends that the 
fireboat Is ineffective in fighting Port fires due to its age, slow speed and limited 
capacity. 

The Fire Department contends that the continued use of the fireboat is necessary 
to protect the public safety and property along the waterfront. The Fire Department 
points out that the Port has been slow in installing fire protection methods and there are 
numerous highly combustible wooden piers, sheds and warehouses that can only be 
accessed by the fireboat. Because the Port's capital improvement plan calls for the 
installation of sprinklers only when a facility is renovated or newly constructed, only 12 
percent, or 64, of the Port's 547 structures are currently sprinklered for fire protection. 
The Fire Department also asserts that the fireboat was recently renovated at a cost of 
$818,000, paid for by general obligation Fire Protection Bonds and is an effective fire 
fighting tool. 

Other Jurisdictions 

For comparison purposes, we conducted a survey of the fire protection services at 
the following six West Coast ports: 

Port of Long Beach; 

- Port of Los Angeles; 

- Port of Oakland; 
Port of Redwood City; 
Port of Seattle; and 

- Port of Tacoma. 



Letter from the City Attorney to the Board of Supervisors on April 20, 1979 
concerning the funding of the Fireboat Phoenix.* This letter resulted from a controversy 
in which the City Attorney negotiated a settlement that provided for an equal sharing of 
fireboat expenses between the Port and the Fire Department. The Port Commission 
approved this Memorandum of Understanding but it was never acted upon by the Fire 
Commission. Since that time, the Port budget has funded all of the costs of the fireboat. 



BOARD OF SUPERVISORS 



BUUGbl ANALYbl 



We found that of the six ports, five used fireboats for fire protection services. In all 
cases, it was the municipal fire department that provides these services to the ports, 
through some type of contractual, tax or budgeting process. However, we also found that 
three of these Ports are receiving new, faster, highly automated vessels with greater 
pumping capacity that require significantly fewer crew members to operate. In two 
cases, independent professional reviews have or are being conducted to determine the 
future level of fire prevention, fire protection and fireboat services that are warranted. 

Alternative Arrangements 

Despite the continued controversy over the level and costs of fireboat protection 
services, there has not been an objective analysis conducted of the alternatives that are 
available for fire fighting at the Port. Discussion with Port and Fire Department 
personnel, review of state-of-the-art technology on fireboats, analysis of the costs to 
continue present level of operations and interviews with port personnel at six other West 
Coast ports indicate that there are at least five alternative arrangements that San 
Francisco could consider. These include the following: 

1- Joint funding between the Port and the Fire Department of fireboat and fire 
protection services, based upon an agreed upon level of services; 

2- Changes in the level of fireboat services; 

3- A more aggressive Port policy concerning the installation of sprinkler and other 
fire prevention measures; 

k- Purchase of a new state-of-the-art (e.g. hydrofoil or amphibious vessel) 
fireboat, which would increase pumping capacity and speed and decrease annual 
©Iterating costs; and 

5- A joint powers and funding agreement among the various ports in the Bay Area 
(e.g. Oakland, Richmond, Redwood City) regarding fireboat services. 

Various combinations of these alternatives may be possible. 

There is a significant cost to providing fireboat services in San Francisco. 
However, it would be premature to either reduce fireboat services or to require that full 
fire prevention methods such as sprinklers be installed throughout the Port until a 
comprehensive, objective study by a fire protection services specialist is conducted. 
Such a study is estimated to cost approximately $20,000. 

CONCLUSIONS 

While the Port currently expends over $1 million annually to operate the 
fireboat Phoenix, between 1981 and 1983 the fireboat was used an average of less 
than once per month and in 1984 and 1985 it was used an average of 1.8 times per 
month to fight fires on vessels or along the waterfront. Over the years, there have 
been significant reductions in the Port's risk to fire, due to improvements in fire 
prevention installations. At the same time, adequate fire protection for the Port 
continues to be necessary. An objective analysis of the level of fire protection 
services that are necessary at the Port has not been conducted and is beyond the 
scope of this audit. 



BOARD OF SUP E RVISORS 
BULXJul ANALYST 



RECOMMENDATION 



We recommend that the Board of Supervisors retain an independent 
consultant, highly experienced in fireboat activities at other Ports, at a total cost 
of approximately $20,000, to evaluate (a) the efficiency and effectiveness of the 
existing fireboat and other fire protection services maintained at the Port of San 
Francisco and (b) various alternative strategies as cited above for the Port to 
further increase its fire protection capabilities, to reduce the long term cost of fire 
protection and to reduce the Port's overall fire risk. 

SAVINGS/BENEFITS 

For a total City expenditure of approximately $20,000, the Port and the Fire 
Department would receive objective professional directives regarding the provision 
of the most cost effective fire protection services. 



BOARD OF SUPERVISOF^ 



SECTION IV.3: PROVISION OF ELECTRICITY 



PG&E IS UNDER AN ORDER FROM THE STATE 
PUBLIC UTILITIES COMMISSION TO DEVELOP A 
PLAN TO TAKE OVER THE PORPS ELECTRICAL 
DISTRIBUTION SYSTEM. A TIMETABLE FOR 
IMPLEMENTING THIS PLAN HAS NOT YET BEEN 
FULLY DEVELOPED. PROVISION OF ELECTRICITY 
BY THE PORT RESULTS IN AN UNNECESSARY 
BURDEN FOR THE PORPS ACCOUNTING, 
MAINTENANCE, AND ENGINEERING DEPART- 
MENTS AND INCREASES PORT LIABILITY FOR 
DAMAGES CAUSED BY ELECTRICAL FAILURE. 
FURTHER, AS OF 12/31/85, 66.5 PERCENT OF THE 
PORPS OUTSTANDING ELECTRICITY BILLS WERE 
PAST DUE BY 90 DAYS OR MORE. 



History and Current Status 

The Port purchases electricity fronn Pacific Gas and Electric ^ompany (PG&E) and 
resells it to some Port tenants at a twenty-five percent surcharge. The Port has been 
reselling electricity in this way for at least seventy years, at rates based on the Port's 
tariff schedule filed with the Federal Maritime Commission. Port staff is responsible for 
electrical service installation, the maintenance of this service, reading meters and billing 
the Port's electrical customers. 

The Port currently has 102 meters and 270 submeters for customers that buy 
electrical power from the Port rather than purchasing this power directly from PG&E. 
The Port maintains the service on Port property up to the point at which such electrical 
service joins the PG&E service. The Port furnishes its own materials and PG&E approves 
installations where appropriate. For tenants who wish to purchase power from PG&E, 
the Port approves tenant modifications to the electrical service through the Port's 
permit process so that PG&E will provide the electrical service to the tenant. 

Fewer than ten of the Port's tenant leases require the tenant to purchase electric- 
ity from the Port. However, some tenants purchase electrical power from the Port 
because the facility they rent is not served directly by PG&E. The Port does not require 
tenants to post a deposit for the provision of electrical service. 

Legal Mandate 

In 1962, the State Public Utilities Commission (PUC) approved an application by 
PG&E to amend its Electric and Gas Rules 18, to end the reselling of power by PG&E 
customers (Application 42434, Decision 63562). This amendment contains a grandfather 
clause that allows some PG&E customers such as the Port to continue reselling power 
while PG&E develops a plan to convert electrical service from the Port. According to 
the Port's Electrical Engineer, PG&E and the Port have developed such a conversion plan 
but there is no timetable for the complete conversion of the electrical service, because 
much of the Port's electrical service does not meet PG&E's standards for conversion. 



All Port tenants purchase gas directly from PG&E and water from the San Francisco 
Water Department. 



BOARD OF SUPERVISORS 



BUDGE! ANALYST 

-6B- 



Conversion Issues 



Conversion to PG&E service can be so costly that many customers prefer to retain 
the status quo. In 1980, the World Trade Club made an analysis of the cost of converting 
the electric service in their portion of the Ferry Building Complex to PG&E standards to 
become direct customers of PG&E. This study showed that conversion would not be cost 
effective for them. Conversion was not undertaken at that time, but conversion to 
direct PG&E service and a general upgrading of the electrical service and facilities ore 
part of the project for the Ferry Building Complex renovation. 

In other facilities, such as Piers 9, 33 and 45, the electrical distribution system is 
so complex and non-standard that major expenditures would be needed to install a service 
that is acceptable to PG&E. Tenants with thirty-day licenses (the majority of tenants in 
Piers 9, 33 and 45) are reluctant to pay the necessary cost of conversion when they do 
not have the security of a long term lease which would allow them to amortize the cost 
of the conversion. As a result, they do not convert to direct PG&E service. 

Formerly, PG&E service came to the Port's bulkhead for a single tenant and the 
Port resold the electricity to only one tenant. As piers hove become surplus to maritime 
uses and the one tenant per pier has been replaced by many tenants, the Port has 
installed submeters to serve these tenants. Service was installed when needed and 
connected to PG&E service at the most convenient point with no basic scheme or plan 
for these electrical installations. For example, some tenants on Piers I and 3 receive 
power from a Pier I source and some receive power from a Pier 3 source. PG&E has 
stated that a number of these Port installed meters, transformers and distribution 
systems are unacceptable and will not provide direct service to these tenants until the 
system is rebuilt to meet PG&E standards. In order to bring these systems up to PG&E 
standards, the Port should plan for the conversion as part of its upgrading of all Port 
facilities. According to Port staff, most of the easier conversions have been made and 
those that remain are difficult, expensive and require a major planning effort. 

Port Responsibilities 

The Port's staff currently maintains electrical facilities that would normally be 
maintained by PG&E. The Engineering and Maintenance Division is responsible for the 
installation, maintenance, engineering, and recordkeeping of electrical service on Port 
property. The Accounting Department of the Port bills and collects payments for 
electrical service. The Port does not require a deposit for its electrical service to 
tenants, exposing the Port to potential financial loss from bad debts. The Port also has 
some responsibility for damages caused by failure of this system causing a possible 
electrical fire. Conversion to PG&E power would simplify the Port's maintenance 
function, decrease the Port's maintenance service expenses and reduce administrative 
liability for electrical damage and loss of revenue from bad debts. 



BOARD OF SUPERVISORS 
BUOCer ANALYST 

-6-3- 



The Port has encouraged a number of tenants to buy electricity directly from 
PG&E by converting their electrical service to PG&E standards at tenant expense. As a 
result, there has been a decrease in the number of customers from I98A to 1986 as the 
Port implements its program to end its role as a reseller of electricity. According to 
Port staff, twenty to thirty tenants make the conversion to PG&E service each year. 
Revenue exceeded costs for Port purchase of electricity in fiscal year I98V85 by 
$242,000, compared with a surplus of $288,000 in f iscal year 1983-84, reflecting the 
reduction in the number of Port electrical customers. The Port's budget for 1985-86 
shows revenues of $960,000 compared to an expected PG&E expense of purchasing power 
for resale of $768,000 for a surplus of $192,000. 

However, the surpluses for provision of electricity by the Port do not consider Port 
expenses for the electrical services other than the cost of the electrical power from 
PG&E. Such additional costs include the cost of accounting, maintenance, engineering 
and materials, which are substantial but have not been fully enumerated by the Port. In 
1979, Port staff estimated maintenance expenses alone to be $175,000 but staff has not 
estimated the amount currently being spent for maintenance or the cost of the other 
Port services. Using an inflation rate of four percent per year, we estimate maintenance 
expenses of $221,000 in 1985-86 compared with only $192,000 in net sales revenues. To 
the cost of maintenance must be added the expense of the other Port services. On 
balance, then, it is not cost-effective for the Port to maintain this service. We realize 
that this analysis is not an accurate cost accounting of current costs of reselling 
electricity. However, the Port does not maintain records to readily calculate this 
expense, which they state is significant. Port staff describe the provision of electricity 
as a marginal service which they would like to end. In addition, as of December 31, 1985 
the Port had 66.5 percent or $176,499 in electricity sales accounts that are past due by 
at least ninety days. The Port is not likely to collect these delinquent accounts. Unlike 
most other Port over due accounts, however, the Port has already had to pay PG&E 
$141,199 to purchase this electrical power plus the Port has incurred the added expense 
of account administration. 

Alternatives 

In the Capital Improvements Section of this report (See Section II. I), we have made 
recommendations to upgrade and improve existing Port facilities to maintain safe and 
profitable operation of these facilities through a planned improvement program with a 
timetable established to refurbish each facility. The Port could include the upgrading of 
electrical service to handle office, restaurant and air conditioning equipment and 
simultaneously make the conversion of Port electrical service to direct PG&E service for 
each facility. The Port could fund these improvements to electrical service and not have 
to depend upon tenant requests. 

While the Port cannot transfer all responsibility for electricity to PG&E without 
incurring costs, the Port could decrease the number of tenants which purchase electricity 
from the Port at little or no Port expense. Of the 270 Port electricity customers 
(submeter accounts), an estimated forty-nine accounts have monthly billings of less than 



The Port has explored the possibility of buying electricity from Hetch Hetchy rather 
than from PG&E for its and its tenants' use. However, this would result in lost revenues 
to the City since the City receives more compensation from the resale of excess Hetch 
Hetchy power to PG&E per unit of electricity than it would from the Port. In addition, 
there would be an increase in transmission expenses to the City. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 
^ 



$20 and of these, eleven have individual nneters. In addition, thirty-seven other accounts 
have individual meters. We recommend that the Engineering Department prepare an 
analysis of the cost to convert these eighty-six accounts (^9 plus 37) to direct PG&E 
service and a strategy to implement this conversion. 

In the short run, the Port could also increase revenues gained from selling 
electricity because the Port provides electricity to the houseboats and small boats in 
China Basin at no cost to these tenants. The Port paid PG&E $21,610 in calendar year 
1985 for this electricity. Had the Port charged the houseboat community the standard 
twenty-five percent surcharge for this service, Port revenues would have totalled 
$27,012. According to the Fiscal Officer for the Port, an Accounting Department audit 
conducted two years ago of all electricity accounts did not include the account at China 
Basin. Therefore, China Basin houseboat tenants were not billed for electricity use. 
The Port should require that these China Basin tenants become direct PG&E customers 
as soon as possible but, until the change is made, bill them including the Port's 
surcharge. (See Section IV. I on China Basin houseboats). 

CONCLUSION 

PG&E is under a State Public Utilities Commission order to end the Port's 
reselling of PG&E power to Port tenants but neither PG&E nor the Port have fully 
implemented a plan to do so. The Port has an existing program to end the resale of 
electrical power but PG&E finds some Port electrical power distribution systems to 
be unacceptable. There are many problems for converting to direct PG&E 
service. However, this conversion should be expedited since it is not appropriate 
for the Port to continue to purchase and resell PG&E electrical power. 



RECOMMENDATI ONS 

We recommend that: 

The Port and PG&E develop a joint program to encourage tenants to make the 
required conversions to PG&E service and to purchase power directly from 
PG&E. 

The Port develop a strategy to eliminate accounts that amount to less than $20 
per month or that have an individual meter. 

As part of the overall capital improvements on Port property, the Port develop 
and implement a plan for converting service to PG&E on a facility-by-facility 
basis at Port expense as appropriate. 

The Port eliminate the clause in renegotiation of present leases and in future 
rental agreements requiring tenants to purchase electricity from the Port 
instead of from PG&E and to continue to bill these tenants until such a 
conversion to direct PG&E service is made. 

The Port require the houseboat comcnunity in China Basin to pay PG&E directly 
for the electricity it receives and, until the conversion is made to direct PG&E 
billing, to charge it Port rates, including the Port's surcharge. 

The Port require tenants who purchase electricity from the Port to post a 
deposit with the Port similar to the deposit required by PG&E for its service. 



BOARD OF SUPERVISORS 
BUDGET ANALYST 
7/ 



Note that, if the Port were to implement the above recommendations, these 
actions would reduce the number of Port electrical customers by forty-eight to 
eighty-six customers or from eighteen to thirty-two percent in the first year; the 
complete elimination of the reselling of PG&E electrical power by the Port would 
take many years. 



SAVINGS/BElsEFITS 

The conversion of all the Port's tenants to direct PG&E service would (permit 
the Port to comply with State PUC directives, will reduce the Port's maintenance 
requirements and accounting costs, will eliminate the Port's potential liability for 
providing electrical power to its tenants, and reduce exposure to bad debts. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 

-2^ 



GLOSSARY 



BOARD OF SUPERVISORS 
BUDChI ANALYSI 

-73- 



GLOSSARY 



Breakbulk Cargo: Cargo shipped in bags, boxes and^)r on pallets. 

Bulkhead: A wall or embankment for holding back earth to prevent its subsidence into a 
body of water such as San Francisco Bay. 

Burton Act: An act approved by the State Legislature in 1968, and amended in 1980, to 
transfer Port lands from the State to the City to be held in trust by the City. The 
Act permits these lands to be used for commerce, navigation, fishing, open space 
and recreation. 

Commerce: The buying and selling of goods. 

Container: Typical containers are made of steel, are watertight, and measure 20 or 40 
feet long, 8 feet wide, 8 feet high. Cargo is packed into containers, transported to 
and loaded aboard a ship. 

Containers on Flat Cars (COFC): A method of transporting containers on railroad cars. 
There are two major variations, as follows: 

Traditional: a combination of 20 and/or 40 foot containers with a total length of 
80 feet set in tandem on a standard 89 foot railroad flat car. 

Double Stack: A specialized railcar that is made up of sections. These sections, 
which measure approximately forty-five feet in length, share the railroad truck 
with the adjacent section. These 45 foot sections each have a capacity for two 
containers, one container stacked on top of the other. The advantage of the 
stack pack over the traditional railcar or boxcar is the reduction of tare weight 
by using stack packs. In effect, cost is reduced because two containers can be 
carried for almost the same cost as one container. (Tare weight is any weight 
other than the cargo that is associated with the movement of freight. For exam- 
ple, the weight of the railcar, itself.) 

Demurrage: A charge assessed against merchandise that is not removed from a wharf 
within an allowable free time. Free time is currently seven days for inbound cargo 
or ten days for outbound cargo, excluding Saturdays, Sundays and holidays. 

Dockage: A charge assessed against a vessel for berthing at a pier, wharf, or bulkhead, 
or a charge for mooring to another vessel so berthed. This charge is normally based 
on the vessel's length and the time that it is berthed (a daily charge per 24 hours). 

Drayage: A charge assessed against a shipper for any trucking required to move cargo, 
based on weight or size and distance hauled. 

Drytxjik Cargo: Cargo, such as grain, that is loaded/jnioaded in bulk to/from the hold of a 
ship to/From grain elevators. In the Bay Area most drybulk is exported. 

Export: Freight destined for a country other than the country of origin. 

Finger Pier: A wharf structure built over water extending from the shoreline like a 
human finger. By extending out from the shoreline, finger piers allow ships to be 
secured in deeper water away from shore and allow space for a greater number of 
ships to be tied up than would be possible if ships were secured parallel to the 
shore. Finger piers do not allow for the space required to maneuver containerized 
cargo. 



Fishery: The business of catching, packing or selling fish, shellfish, etc. 

Foreign Trade Zone: A Federal Government authorized public space where merchandise 
is accepted exempt from U.S. Customs laws and duties until offered for consumption 
in the United States or re-exported. Importers benefit from a reduction in insurance 
and overhead costs. 

Import: Freight that is coming into a county from another country. 

Intermodal: Between different modes of transportation such as ships and railcars. 

Intermodal Container Transfer Facility (ICTF): A facility designed for containerized 
freight to be moved directly from a ship to a railcar or truck saving time and 
reducing freight handling and storage. The heart of the system is a railyard used to 
make or break up trains and a rail spur that runs along a wharf that allows a crane 
operator to move the container between the boat and railcar in one movement. 
When an ICTF is fully utilized, the container never touches the pier or storage area. 

Lease: An agreement with specific beginning and termination dates. 

License: As used by the Port, on agreement for use of a Port facility. A Port license 
can be terminated vyith 30 days notice by either party. 

Liquid Bulk Cargo: Liquid cargo, such as petroleum products, tallow or vegetable oil, 
that is shipped by tanker. 

Live-Aboard Boat: A boat used for both navigation and as a principal place of residence 
when moored. It is distinguished from a houseboat, which is used exclusively as a 
residence and is not capable of moving on its own. 

Marketing: Marketing is not advertising; Although, advertising is a part of marketing. 
Marketing is a complex concept involving various other organizational activities. 
Marketing is the analyzing, organizing, planning and controlling of an organization's 
resources, policies, and activities with a goal of satisfying the needs and wants of 
selected customer groups at a profit. Therefore, marketing often begins with the 
organization of information used to decide and to define which customer groups are 
to be served. Then, information is required to decide the nature and design of the 
products or services to be offered, pricing strategies, sales and distribution channels 
to be used, advertising methods, and to decide collection and quality control 
practices. Marketing is the major responsibility of top management and controls and 
integrates all other activities of an organization. 

Navigate: To steer or direct a ship or aircraft. 

Navigation: I. The act or practice of navigating; especially the science of locating the 
position and plotting the course of ships and aircraft. 2. Traffic by ship. 

Revenue Sharing: As used by the Port, a concept where, in exchange for a commitment, 
there is a reduced tariff. « 

Roll On/Roll Off (RORO): A type of ship that allows automobiles, trucks and buses to be 
driven on (Roll On) and off (Roll Off) a ship. The RORO method is used extensively 
in the import of automobiles coming into the Bay Area. 



BOARD OF SUPERVISORS 
BUDGET ANALYST ^ , 



Shipper: A shipping agent or someone who cosigns or receives goods for transportation. 
Shipping: As used in this report, shipping means having to do with ships in Port. 
Shipping line: A company providing ship transportation. 

Subsidence: The process of settling, as in a pier settling into the harbor floor. 

Stevedore: A person who contracts for the loading and unloading of cargo or baggage 
from and to ships. A stevedore firm hires longshoremen to perform the actual 
loading or unloading. 

Tare Weight: Weight not associated with cargo, such as the weight of the container, 
container carrier, crew, tractor, and engine. One primary goal of efficient shipping 
is to reduce the ratio of tare weight to cargo weight. 

Tariff 3-C: This is a schedule of rates charged for services such as dockage, wharfage, 
demurrage, etc. by the Port of San Francisco. 

Terminal Operator: A company providing stevedore services to shipping lines and other 
ship operators. 

Twenty-foot Equivalent Unit (TEU): A standard measure of container traffic. A 
container 20 feet long, 8 feet wide and 8 feet high is one TEU. A 40 foot container 
is equal to two TEU. 

Wharf: A structure alongside which ships are tied to load and unload. 

Wharfage: A charge assessed against a ship's cargo. 

Wharfinger: An employee of the Port who oversees all activity on the piers, wharfs and 
bulkheads of the Port. Duties include, but are not limited to, ship loading and 
offloading, recording the time at the pier of moored ships, prepares reports of 
damage to facilities and verifies passenger traffic. 



BOARD OF SUPERVISORS 



BUDGET ANALYST 



APPENDIX 



BOARD OF SUPERVISORS 



BUDGE^^NALYSI 



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WRITTEN RESPONSE OF EXECUTIVE DIRECTOR 



BOARD OF SUPERVISORS 



BUDGET ANALYST 



I 



1 




EXECUTIVE DIRECTOR'S WRITTEN RESPONSE 



TO 



MANAGEMENT AUDIT OF THE PORT OF SAN FRANCISCO 



by 

Eugene L. Gartland 



(REPORT TO THE SAN FRANCISCO BOARD OF SUPERVISORS 
BY THE BUDGET ANALYST) 



MAY 1986 



-85- 



INTRODUCTION 



The Budget Analyst's Management audit of Port of San Francisco operations is 
disappointing and misleading in several respects. 

Despite extensive comments offered by Port administrative staff following 
review of two earlier drafts of this report, the version given to us for final 
review still contains numerous self-contradictions and errors of fact, and it 
continues to reflect a serious lack of understanding of the legal, political, 
and economic environments in which the Port must operate. 

Among its many inadequacies, the following stand out*: 

o Vacancy rate is miscalculated — The Budget Analyst's report 

erroneously claims a vacancy rate of 23.6 percent (page 50) for Port 
properties, which it further claims is far above the vacancy rate in 
the city as a whole. In fact, the Port has only 60,000 square feet 
of office space vacant, out of a total of 404,000 sq. ft. available, 
for a vacancy rate of 15 percent, which is comparable to that of the 
Financial District and better than that of many of the city's 
business areas. 

o Commercial value of Port property is not understood The report's 
projection of $100 million in annual revenues from commercial 
development (page 12) is based on a mix of faulty logic and an 
unsubstantiated valuation of Port property at $1 billion. The market 
value of a given parcel of land is directly related to what can be 
built on it. Correspondence between the Port and such legally 
empowered regulatory agencies as the Bay Conservation and Development 
Commission (BCDC) and the State Lands Commission makes it clear that 
some of the things specifically recommended by the Budget Analyst's 
report are prohibited (the recommendation to build a mixed-use 
development on Pier 80, for example). 

o Cost estimates are inconsistent — On Page 2, the report states that 
the cost to implement all of its recommendations would be "$50,000 
annually, plus $58,533 in one-time costs." On page 17, it states 
that "implementation of this recommendation would require the Port to 
spend an estimated $20 million annually over 10 years and would 
require a significant undetermined amount of capital investment and 
personnel cost." 



We cannot be certain our comments will correspond item for item with the 
report as released, since the Budget Analyst has reserved the right to 
alter the final report should our final written response prove persuasive. 



-86- 



o ReneRotiation of lonR-term leases is unlikely — Several restaurants 
in the Fisherman's Wharf area, holders of extremely favorable leases 
that do not expire until well into the next century (all of them 
dating back 10 to 15 years), have entered into short-term agreements 
with the Port for small parcels of adjacent property. The Budget 
Analyst appears to hold the opinion (page 42) that these leaseholders 
would be willing to renegotiate, their long-term leases on terms more 
favorable to the Port in order to protect the smaller parcels now 
held on month-to-month terms. We consider that prospect unrealistic 
at best. 

From these few points, and a great many others contained throughout the 
report, it is apparent that the auditing team of the Budget Analyst's office 
does not have a firm grasp of the realities of managing Port lands. And the 
report fails repeatedly to perceive the significance of the fact that these 
lands do not belong to the City of San Francisco but are, in fact, state-owned 
lands over which the Port exercises stewardship under elaborate constraints. 

The Port's actions are regularly and closely scrutinized by such agencies as 
BCDC, the State Lands Commission, and the U.S. Array Corps of Engineers, to 
name but a few of the local, state, and federal jurisdictions in which we 
operate. Each has its own view of what is best for the waterfront, each 
interprets and administers the various laws governing the Port's activities, 
and all must be taken carefully into account in virtually everything the Port 
undertakes. The audit does not recognize these political and legal realities, 
and in effect lightly brushes them aside. 

Nor do the auditors seem familiar with the maritime industry or the City's 
commitment to it, as expressed on numerous occasions by Mayor Dianne Feinstein 
and endorsed by an overwhelming majority vote for a $42.5 million bond issue 
to revitalize the Port's maritime operations. 

There are, of course, some recommendations of merit in the report. However, 
many of them already have been, or are in the process of being, implemented. 

The Port of San Francisco is arguably the City's greatest single asset. From 
the colorful and historic fishing industry at Fisherman's Wharf to the 
blue-collar employment centers along the industrial southern waterfront, Port 
facilities are among the most visible and productive resources in the City. 
Proper management of these resources demands a professional knowledge of all 
the markets they serve, as well as a thorough understanding of the existing 
political, legal, and economic environments in which they must be operated. 

On each of these requirements, we find the Management Audit to be deficient. 



-87- 



AUDIT STATEMENT 

SECTION I.l: STRATEGIC PLANNING 

"THE PORT HAS SOME OF THE MOST 
VALUABLE PROPERTY ON THE WEST COAST. 
HOWEVER, OVER THE YEARS THE PORT'S 
MANAGERS HAVE NOT DEVELOPED AN 
INTEGRATED PLAN IN ORDER TO USE THE 
PORT'S COMMERCIAL PROPERTY RESOURCES 
TO FINANCE THE DEVELOPMENT OF 
FACILITIES FOR THE MARITIME AND 
FISHING INDUSTRIES. WHILE THE PORT 
HAS MADE VARIOUS ATTEMPTS TO DEVELOP 
SOME OF ITS PROPERTY FOR COMMERCIAL 
USE, AND WHILE STATE REGULATORY 
AGENCIES HAVE HINDERED THESE ATTEMPTS, 
THE PORT HAS NOT BEEN AS AGGRESSIVE IN 
THE DEVELOPMENT OF ITS PROPERTIES FOR 
COMMERCIAL USES AS IT HAS BEEN IN 
DEVELOPING ITS PROPERTIES FOR THE 
SHIPPING INDUSTRY. AS A RESULT, AT 
LEAST ONE MILLION SQUARE FEET OF PORT 
PROPERTY IS EITHER UNUSED OR 
UNDERUTILIZED. FOR EXAMPLE, FOUR 
FACILITIES ON PIERS 27/29, 70, 80 AND 
94/96, WHICH HAVE BEEN VACANT FOR OVER 
ONE YEAR, CONTAIN OVER 434,000 SQUARE 
FEET OF OFFICE AND INDUSTRIAL SPACE. 
BASED ON A TEN PERCENT GROSS REVENUE 
RETURN ON THE ESTIMATED PROPERTY 
VALUE, THE DEVELOPMENT OF ALL PORT 
PROPERTY, CURRENTLY VALUED AT AN 
ESTIMATED $1 BILLION, COULD RESULT IN 
AN ESTIMATED $100 MILLION IN MINIMUM 
ANNUAL REVENUES TO THE PORT WITHIN 
TWENTY YEARS, OR OVER $70 MILLION MORE 
THAN THE PORT'S CURRENT ANNUAL RENTAL 
REVENUES OF $29.3 MILLION." 



Port's Detailed Response: 



PORT'S RESPONSE 

The Port, City and BCDC have an 
integrated plan for development of 
Port land to finance the maritime and 
fishing industries. Port projects 
have produced a steadily increasing 
profit since the years the Port faced 
financial crisis. Revenues are 
produced by five major office 
buildings, numerous restaurants, 
retail businesses. Pier 39 and office 
rentals. With this income and an A-1 
bond rating, the Port sold a $42 
million bond issue to finance maritime 
and Fishermans's Wharf improvements. 
More projects are in the pipeline on 
Piers 3 and 45 and four other northern 
waterfront parcels are planned for 
development. The Report suggests the 
Port should have built on its 
properties whatever a private 
landowner would build and failure to 
do so shows a "limited enthusiasm". • 
In fact the State Constitution, 
legislative acts and regulatory 
restraints prohibit such land uses. 
The value of Port land is directly 
related to the permitted uses. The 
report states, due to land use 
restrictions, "... the Port must put 
all development to low revenue 
producing maritime purposes or do no 
development at all ...." and then the 
Report is critical of the Port doing 
what they say we must do! The actual 
vacant space in the areas referred to 
is 36,050 sq.ft., not 434,000 as the 
report erroneously states by counting 
300,300 sq.ft. now under environmental 
review and two other unusable sites. 
The report provides no substantiation 
of the value of Port property. The 
$70 million increase in revenues the 
report says the Port could achieve in 
twenty years would be achieved solely 
through eight percent annual growth 
and escalation with no new development. 



The Issue of Real Estate, Regulatory and Maritime Context 

The Report did not examine or understand the real estate, regulatory or 
maritime context of Port property. Notable omissions in the list of 
agencies interviewed are the Bay Conservation and Development 
Commission (BCDC) and the State Lands Commission, the two agencies with 



-88- 



primary regulatory control over Port land. The report suggests that the 
Port has not been aggressive enough with these agencies, while in fact 
the present administration more than any previous leadership has made a 
priority of working to resolve the conflicting directives and land use 
policies governing the Port. 

The Port does not "invent" these restrictions (see the McAteer-Petris 
Act; Public Resources Code; Planning Code, Section 240,1). Under Section 
6306 (b) of the Public Resources Code as well as the Burton Act, it is 
clear that all revenues received from these trust lands shall be expended 
only for those uses consistent with the public trust for commerce, 
navigation and fisheries. Regulatory agencies have advised that the land 
use and development choices are strictly limited. The Port supports 
legislation or amendments modifying existing constraints so that 
reasonable development can take place. 

The Port is also subject to the leasing, land use, and environmental 
authority of the Board of Supervisors, City Planning Commission, U.S. Army 
Corps of Engineers, Regional Water Quality Control Board, Fish and Game, 
Coast Guard, and other agencies. Maritime development must provide 
public access to the shore and cause minimal impacts to the Bay. 
Non-maritime developments must pay for and maintain large areas of public 
access, as well as pay the fees imposed by the City for transit, etc. 

The Issue of Accomplishments 

It would be hard to find a more constrained business and regulatory 
environment within which to work. In this context, it is remarkable that 
the Port has effectively pursued so many worthwhile projects. A partial 
list includes: 

North and South Container Terminal modernization 

Intermodal Rail/Container Transfer Facility (ICTF) design and development 

Fisherman's Wharf Breakwater legislation, funding and implementation 

Jefferson St. Seawall funding, design and completion 

Commercial fishing berth improvements (power, water, ladders) 

Pier 30-32 Cold Storage and Container Freight Station development 

Pier 70 Warehousing and Container Freight Station planning 

Roundhouse Plaza leasing agreement 

Pier 7 Public Fishing Pier design, funding and grant applications 
Pier 45 Hotel and Hyde St. Pier commercial fishing project 
Piers 1-1/2, 3, and 5 offering and developer selection 
Waterfront Promenade funding and completion 

The Issue of Conflicting Land Use Directives 

The Report states that the Port "falters" when a difficulty is 
encountered in the planning or regulatory process. This is untrue. For 
example, in order to expedite processing of Port environmental review 
through the City Planning Department, the Port has paid the salary of 
Environmental Review staff to augment departmental resources. Port staff 
also has an excellent relationship with BCDC staff, and this cooperation 
has resulted in expedited permit review. No examples of the "faltering" 
are given in the report. 

As an example of the conflicts in planning done by outside agencies. Pier 
45 was designated for housing in 1981 - a use explicitly prohibited under 



-89- 



the public trust doctrine of the State Lands Commission. The current 
.Port administration formed a civic advisory group, redefined the land 
uses, and is moving ahead with a new pier and berthing for commercial 
fisheries and a hotel and public assembly uses on Pier 45. In another 
example. Pier 24, designated by planners for mixed use development, is in 
poor structural condition and has to be rebuilt. Rebuilding can only be 
permitted if the uses are water-oriented under the McAteer-Petris Act 
(BCDC legislation) and cannot be for office or commercial use. This is 
an example of a "self-cancelling" land use policy that the Port inherited 
and is working to change. 

On the southern waterfront, BCDC/MTC Seaport Plan designates "Near Term" 
and "Long Term" container terminal sites, and BCDC will only permit 
interim uses in these areas. On Port land there are four such sites 
which consist of hundreds of acres of Port and privately owned land. 
When the Port wanted to put a ship repair operation at Pier 50 under a 
long-term lease, it was precluded from doing so by BCDC. This operation 
was limited to five years and may not be renewed without a commitment to 
relocate. But it presently returns to the Port $750,000 annually. 

The Issue of "Sound Business Management" 

We share the report's concern for the ability of the Port to fund needed 
improvements to its facilities and infrastructure without relying on the 
General Fund. However, the Report dwells on old issues and decisions of 
past administrations perpetuating myths about poor management. The 
Report ignores a ten-year record of increasing financial strength, 
professional staffing changes, upgrading of bond rating from Bbb to 
"A-1", reduction in accounts receivable and favorable management letters 
from its outside auditors. 

The Port has been brought from the threat of bankruptcy in 1976-77 to a 
strong financial position at present, with a net income of $5.8 million 
in 1985. This could never have been accomplished without professional, 
business-like management. The Report has numerous references to past 
decisions which the present management cannot change. Yet the Port must 
still deal with the consequences of those decisions. 

The Issue of Use of Private Developers 

The Port has used the financing provided by developers under long-term 
leases to accomplish development of surplus property which has been very 
attractive to private investment. The Report suggests such an approach 
as if it were a wholly new idea. This has been Port Commission policy 
for many years as outlined in Maritime Strategy II. The leases provide 
that the Port participates in the profits from these developments, 
receiving a minimum rent plus "percentage rents" based on the 
profitability of the development. This has been standard practice for 
many years . 

The Issue of Costs to Implement Report Recommendations 

The introduction to the report estimates the cost to implement the 
Report's recommendations at $50,000 annually plus $58,539 in one time 
costs. But the body of the Report states that one recommendation alone 
would cost $20 million annually for ten years and an undetermined amount 
of capital and personnel cost. The Report underestimates the costs and 
exaggerates the gains to be achieved by implementing its recommendations 
but does nothing to substantiate its projections. 



-90- 



AUDIT. STATEMENT 

SECTION 1.2: FACILITY ACCOUNTING 

"SINCE THE PORT DOES NOT ALLOCATE 
REVENUES AND EXPENDITURES TO ITS 
SPECIFIC FACILITIES, THE PORT DOES NOT 
KNOW EITHER THE COSTS OF ITS SPECIFIC 
FACILITIES OR WHETHER THESE FACILITIES 
ARE OPERATING AT A PROFIT OR A LOSS. 
AS A RESULT, THE PORT IS NOT ALWAYS 
ABLE TO OPERATE IN A BUSINESSLIKE 
MANNER. WITH THE LACK OF THIS BASIC 
COST INFORMATION, THE PORT IS HAMPERED 
IN MAKING SOUND DECISIONS AND DOES NOT 
KNOW IF THE EXPENDITURES MADE AT A 
SPECIFIC PORT FACILITY ARE JUSTIFIED 
BY THE REVENUES GENERATED BY THAT 
FACILITY. FOR EXAMPLE, THE PORT DOES 
NOT KNOW THE MAINTENANCE COSTS OF 
EITHER FISHERMAN'S WHARF OR OF PIERS 
94/96 ." 



P ORT'S RESPONSE 

The Port has a plan to implement, 
within nine months, an automated cost 
accounting system that will provide 
revenues and expenses by facility. 
This is not a new idea, but one that 
current staff initiated. The Port is 
awaiting approval by the City of its 
data processing plan essential to this 
effort. Revenue and direct expense 
information by facility is currently 
available. The Port's favorable 
management letters from its outside 
auditors, improved bond rating, 
coupled with its increase in revenues, 
additional shipping lines and 
development agreements do not 
substantiate the Report's charge of 
not operating in a sound, businesslike 
manner . 



AUDIT STATEMENT 

SECTION 1.3: COLLECTION PROCEDURES 

"THE PORT'S ACCOUNTING DEPARTMENT HAS 
INADEQUATE POLICIES WITH RESPECT TO 
THE COLLECTION OF THE PORT'S 
DELINQUENT ACCOUNTS RECEIVABLE OWED BY 
ITS TENANTS. THE PORT CURRENTLY HAS 
DELINQUENT ACCOUNTS AMOUNTING TO $3.68 
MILLION INCLUDING SOME ACCOUNTS THAT 
ARE OVER TWO YEARS OLD. AS OF MARCH, 
1986, NINE TENANTS OWE THE PORT IN 
EXCESS OF $1.6 MILLION AND HAVE BEEN 
IN ARREARS FOR OVER 60 DAYS BEYOND THE 
DUE DATE FOR THESE PAYMENTS. THE PORT 
HAS WRITTEN OFF BAD DEBTS OF OVER 
$700,000 IN 1985, AND OVER $400,000 IN 
1984. AS OF 12/31/85, 63.2 PERCENT OF 
THE PORT'S ACCOUNTS RECEIVABLE WERE 
PAST DUE BY 90 DAYS OR MORE. REVISING 
PORT COLLECTION POLICIES AND 
INCREASING TENANT SECURITY DEPOSITS 
WOULD INCREASE PORT REVENUES BY AT 
LEAST AN ESTIMATED $40,000 ANNUALLY." 



P ort's Detailed Response: 
Continued, next page. 



P ORT'S RESPONSE 

The Port has an aggressive and well 
documented Collection Policy. It 
compares favorably to similar ones in 
private industry and other City 
departments. In the last three years 
the Port's receivables decreased from 
$5.6 million to $3.5 million, accounts 
60 days past due decreased from 36 7 
accounts to 192, accounts receivable 
as a percentage of six-month sales 
decreased from 44% to 24%. The nine 
accounts over 60 days are in the City 
Attorney's hands for collection. Four 
of these are facility damage claims, 
not delinquent rents. One, Roundhouse, 
is a rent deferral approved by the 
Board of Supervisors. Collections 
policies will not change accounts in 
litigations. The $700,000 written off 
in 1985 was 2.4% of total operating 
revenues; the $400,000 in 1984 was 
1.4%. The Accounts Receivable 
Write-off Policy was approved by the 
Port Commission and has been in effect 
since July 1984. Of the 63.2% 
receivables 90 days past due, accounts 
representing 4 7.5% have been forwarded 
to the City Attorney and are in 
litigation. Only 15% are the 
responsibility of the collections 
section. 



-91- 



The Issue of Collections Policy 



The report recommends that the Port develop and install new collection 

procedures, and that these procedures should cite legal authority for 

taking actions. The report further recommends that the Port should amend 

the write-off policy to include downward adjustments of accounts. 

The Port has adopted and follows an aggressive, well documented, 
comprehensive collection policy which includes strict legal guidelines. 
A copy of the collection policy was provided to the audit team. The City 
Attorney has reviewed the collection policy and has approved it. In 
fact, the Budget Analyst is the only party to believe additional citing 
of authority is necessary, although the Budget Analyst admits that this 
would likely not result in increased collections. 

The "downward adjustments", quoted above, refers to credits to accounts 
receivable for billing adjustments, which are made to correct billing 
errors. These have nothing to do with bad debt write-offs, and we see no 
reason to include it in either the collection or write-off policies. 

$40,000 in revenues could be saved by increasing tenant deposits. 
However, this can be accomplished without revising Port collection 
practices. The Budget Analyst offers no suggestions to improve 
collection policies or procedures that will result in increased revenues. 

The report recommends the Port develop a comprehensive procedures manual 
which addresses all such collection issues and details the circumstances 
and authority under which any actions can be taken. A collection policy 
and a collection procedure have already been developed and are in place 
and working well. These policies, along with the write-off policy, 
specifically identify the steps in the collection process, the timing of 
these steps, and responsibilities by staff position. The policies also 
list levels of authority by staff position to recommend settlements and 
write-offs of accounts, which then must be approved by the Port 
Commission and the Controller's Office. 

The report recommends that we develop a program — in conjunction with 
the Wharfinger's Department — to improve the collection of facility 
damage claims in order to determine the proper amount due to the Port. 
The Port has a Facility Damage procedure, prepared in October 1984, which 
addresses this issue and is working well. 



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AUDIT STATEMENT 

SECTION II. 1: CAPITAL PROJECT PLANNING 

"THE PORT IS COMMITTING MILLIONS OF 
DOLLARS IN BOND FUNDS AND OTHER FUNDS 
TO MODERNIZE CARGO HANDLING FACILITIES 
IN THE HOPES OF CAPTURING MORE 
CONTAINER SHIPPING BUSINESS. THE PORT 
HAS ORDERED TWO NEW CRANES AND IS 
ACQUIRING ONE USED CRANE AT A COST OF 
$6.9 MILLION. ADDITIONALLY, THE PORT 
PROPOSES TO REBUILD AN EXISTING CRANE 
AT A COST OF $1 MILLION EVEN THOUGH 
THE USE OF THE PORT'S EXISTING CRANES 
IS FAR BELOW THE INDUSTRY AVERAGE. IN 
FACT, TO INCREASE THE PORT'S PRESENT 
CRANE USAGE TO THE INDUSTRY AVERAGE, 
THE PORT WOULD HAVE TO INCREASE THE 
ANNUAL NUMBER OF CONTAINERS MOVED BY 
227 PERCENT FROM AN AVERAGE OF 15,303 
TO AN AVERAGE OF 50,000 FOR EACH OF 
ITS SEVEN EXISTING CRANES WHICH ARE 
NOW USED LESS THAN FIVE PERCENT OF 
THEIR AVAILABLE TIME. CLEARLY, BY 
ADDING THREE CRANES FOR A TOTAL OF 10 
CRANES, THE PORT'S CONTAINER HANDLING 
CAPACITY WILL FAR EXCEED ANY CARGO 
PROJECTIONS WELL INTO THE FUTURE. 
THEREFORE, THE PORT SHOULD DEFER THE 
PROPOSED $1 MILLION REBUILDING OF AN 
EXISTING CRANE AND DEFER AN ADDITIONAL 
ESTIMATED $4 MILLION FOR OTHER CARGO 
HANDLING IMPROVEMENTS. THIS TOTAL OF 
$5 MILLION SHOULD BE PRODUCTIVELY USED 
FOR THE DEVELOPMENT OF SEVERAL 
COMMERCIAL REVENUE PRODUCING CAPITAL 
PROJECTS ON PORT PROPERTY." 



P ORT'S RESPONSE 

This recommendation is a poorly 
supported attempt to divert funds from 
container terminal modernization to 
non-maritime maintenance and repair 
projects with no income producing 
potential. The Port has a very 
specific plan for its capital projects 
which is periodically updated to 
reflect current requirements. The 
$1 million for the upgrading of one 
container crane has never been 
scheduled for implementation and is, 
in effect, deferred. $4.0 million, 
which apparently related to an 
outdated estimate to modify two 
railroad tunnels, was reprogrammed 
over 12 months ago to another high 
priority project - realignment of rail 
track to improve terminal access. Any 
arbitrary unspecified reprogramming of 
bond funds to non-maritime projects 
would jeopardize currently planned and 
scheduled container terminal and ICTF 
construction plans and therefore would 
be extremely detrimental to the Port. 



P ort's Detailed Response : 

The Issue of Maritime Development 

The Port of San Francisco is in a "catch up" mode with respect to building 
the facilities that are needed for the Port to be a competitive player in 
the container marketplace. However, as the Report points out, San 
Francisco has rail access equal to or better than other Bay Area ports, 
and has natural deep water channels. Construction of the Intermodal 
Container Transfer Facility (ICTF) gives one additional cost advantage to 
shippers using San Francisco. With these assets, the Burton Act mandate, 
and the voters' approval of the bonds to finance needed improvements, it 
would be irresponsible for the Port to do anything but modernize its 
terminals . 

Modem vessels are becoming larger and larger, with deeper draughts and 
more containers. Additional cranes are required because container vessels 
are getting larger and it is the "surge" nature of the loading/unloading 
of thousands of containers in eight hours that requires crane capacity. 



-93- 



ships do not make money while sitting in Port. Shippers do not want to 
call where there is poor turn-around time. In the Port's marketing, it is 
impossible to attract new lines on the basis of future promises of what 
will be built. The report says the present cranes are idle most of the 
time; but so are most of the City's fire trucks. This is an illogical 
argument. Playing statistical games is no substitute for understanding 
maritime marketing and competition. The Southern Waterfront Master Plan, 
adopted by the Port Commission in 1981, and incorporated into the BCDC/MTC 
Seaport Plan, is the blueprint for development currently underway. The 
Port's analysis included cargo and throughput projections, criteria and 
schedule for improvements. The Port has completed a comprehensive 
Environmental Impact Report ("Master EIR") for all the anticipated 
development options for the North and South Container terminals. 

T he Issue of a Capital Development Plan 

The maritime capital development plan is a hierarchical set of plans, 
proceeding from the regional (Seaport Plan) level to the specific 
implementation plans (engineering and working drawings) that are developed 
for each project. The Report implies that maritime improvements are ad 
hoc decisions and that no thought is given to long-term planning. This is 
entirely untrue. Long-range planning is a function integrated among the 
various Departments and includes outside consulting expertise in areas of 
marketing, engineering and construction. The Southern Waterfront Master 
Plan contains cargo projections, criteria and timetable for provision of 
facilities. In 1981, the Port began planning the full build-out of the 
intermodal rail yard and other improvements now being completed. 

T he Issue of the ICTF 

The Report endorses the development of the Intermodal Container Freight 
Station (ICTF) but implies that the ICTF will not function efficiently 
without tunnel modifications to permit double-stack rail cars. The 
interim ICTF is being used today, and the full build-out ICTF will 
function perfectly well without the tunnel modifications. Obviously, 
double stack capability will enhance the attractiveness of the ICTF, and 
that is why the Port is pursuing tunnel improvements. The Report 
contradicts itself in stating that the tunnel improvements are needed but 
that the expenditure should be deferred. 

T he Issue of Redirecting Bond Funds 

The Report recommends that the spending of $1 million to upgrade an 
existing container crane and $4 million for railroad tunnel modifications 
be deferred. -We have already programmed these funds to other 
revenue-generating maritime capital projects associated with the overall 
container terminal modernization and construction of the ICTF. The 
maritime improvements needed at this time far outstrip the funding 
available. The Report's recommendation to make an arbitrary reduction 
from our current plan is not a reasonable approach and raises questions 
about the usefulness of the Report as a management tool. The projects 
that are suggested to be funded with thes§ " rep rog rammed" funds are 
primarily for maintenance and repair, without any new revenue potential. 



-94- 



AUDIT STATEMENT 

SECTION II. 2: AUDITS OF SHIPPING 
LrlNES AND TERMINAL OPERATORS 

"ALTHOUGH THE PORT WHARFINGERS CONDUCT 
AUDITS TO VERIFY WHARFAGE STATEMENTS, 
THEY DO NOT REVIEW EITHER THE PORT'S 
BILLINGS AND LEASE AGREEMENTS OR THE 
SKIPPING LINES' AND TERMINAL 
OPERATORS' PAYMENT AND RELATED 
ACCOUNTING RECORDS. AS A RESULT, THE 
PORT HAS INSUFFICIENT DATA TO 
DETERMINE WHETHER IT IS RECEIVING THE 
CORRECT AMOUNT OF REVENUES WHICH IT IS 
OWED FROM THE SHIPPING LINES AND 
TERMINAL OPERATORS." 



P ORT'S RESPONSE 

This is incorrect. A more thorough 
analysis of the Port's billing and 
audit practices would have shown that 
the Port is in fact able to determine 
and trace the accuracy of what is 
owed. The recommendation reflects a 
lack of understanding of the structure 
of the Port's agreements, since they 
are unlike those of the Port of 
Oakland. Oakland has a complicated 
"use agreement" formula in which the 
previously agreed-upon discount varies 
depending upon actual cargo volume. 
The Port of San Francisco regularly 
audits the ship's cargo manifest, 
which is the basis for the fees to be 
paid. All revenues, including 
maritime, are a part of the Port's 
annual audit by an independent CPA 
firm. The Report elected to look at 
the Port of Oakland's audits in a year 
(1982) that showed a very large 
discrepancy. To suggest that a 
similar revenue gain would be found 
for the Port of San Francisco is a 
classic "apples and oranges" 
comparison. 



Port's Detailed Response: 



The Issue of Audits 



The Report provides no evidence of any problems with the current audits of 
shipping line revenues. Rather than relying upon a thorough analysis of 
the Port of San Francisco and the Port of Oakland procedures for reviewing 
wharfage statements, billings, collection procedures and annual audits, it 
merely makes a hypothetical revenue comparison with the Port of Oakland, 
which has different procedures and different types of shipping line 
agreements . 

Any audit to determine if the Port "...is receiving the correct amount of 
revenues which it is owed from the shipping lines and terminal operators" 
must start with the same source documents, i.e. the cargo manifests. The 
Port regularly audits the cargo manifests of its shipping lines to 
determine the accuracy of the wharfage statements and billings. The 
results of these audits have shown both additional billings and refunds. 

Once the wharfage statement is submitted to the Port, the Wharfinger 
checks the calculations of each wharfage statement and makes any other 
correction that appears necessary before a bill is generated by the 
Accounting Division. This procedure greatly reduces any mathematical 
errors or misapplication of the tariff which is the source of almost all 
of the "additional revenue". The Accounting Department routinely follows 
up on the collection of maritime bills, and in those cases where normal 



-95- 



collection procedures are not totally effective, the Maritime Department 
will follow up directly with the shipping lines. If the Maritime 
Department efforts do not work, the collection is turned over to the City 
Attorneys Office. 

As part of the Port's regular annual audit by an independent CPA firm, all 
Port revenues, including maritime , are audited to verify that revenues are 
being properly reported and recorded. The results of the Port's annual 
audit are submitted to the City Controller. 



AUDIT STATEMENT PORT'S RESPONSE 

SECTION III.l: DURATION OF LEASES 

VERSUS LICENSES Seventy-five percent of the licenses 



ASSURED THAT IT HAS MAXIMIZED ITS 
REVENUES FROM THESE TENANTS." 

Use of license agreements allows the Port to derive revenues from parcels 
that would otherwise be subject to lengthy environmental and permitting 
requirements. Until very recently when an agreement was reached, after 
sustained efforts by the current Port leadership, BCDC would not give 
permits for change of use or long-term tenancies to non-maritime users in 
maritime and Port Priority zones. Even with buy-out provisions, BCDC is 
reluctant to have the Port encumber maritime reserve areas with commercial 
tenants. Licenses are also used so that the Port can readily recapture 
property for planned future uses. For example, licenses have been used 
for restaurants that have storage or garbage areas on Pier 45 at 
Fisherman's Wharf because the pier is out to bid for hotel development. 



"IN LIEU OF AWARDING LEASES, WHICH IN 
SOME INSTANCES REQUIRE THE USE OF 
COMPETITIVE BIDDING UNDER THE PORT'S 
PROCEDURES, THE PORT HAS CHOSEN TO 
AWARD 415 LICENSES TO CERTAIN 
TENANTS. WHILE THESE LICENSES CAN BE 
TERMINATED BY EITHER THE PORT OR THE 
TENANT UPON 30 DAYS WRITTEN NOTICE, IN 
FACT THE PORT HAS PERMITTED NUMEROUS 
LICENSES TO REMAIN IN EFFECT FOR 
YEARS. THESE LICENSES ARE PRESUMED TO 
HAVE BEEN RENEWED EVERY 30 DAYS IF 
NEITHER THE PORT NOT ITS TENANTS TAKE 
ANY ACTION TO TERMINATE THE LICENSES. 
SINCE THESE LICENSES, IN CONTRAST TO 
LEASES, ARE AWARDED BY THE PORT 
WITHOUT UTILIZING ANY COMPETITIVE 
BIDDING PROCEDURES, THE PORT CANNOT BE 



are for office space which is rented 
for the maximum the market will 
support. Most of the office uses are 
in the Ferry Building. Under the 
recently terminated agreement with a 
prospective developer of the Ferry 
Bldg., the Port was prohibited from 
offering leases pending development of 
the building. Now the Port is 
negotiating leases for office space in 
these areas. Licenses have been used 
to allow the Port to derive revenue 
from sites and uses that would not be 
able to get the permits or regulatory 
approvals for permanent status. In 
some cases, licenses are the choice of 
tenants. Licenses are for uses such 
as valet parking, shoeshine and flower 
stands, and sidewalk vendors. 



-96- 



AUDIT' STATEMENT 

SECTION III. 2 COMPLIANCE WITH LEASES 
AND LICENSES 

"AS A RESULT OF INCOMPLETE DATA 
CONTAINED IN THE PORT'S 117 LEASE AND 
415 LICENSE FILES, THE PORT DOES NOT 
KNOW IF ITS TENANTS ARE IN FULL 
COMPLIANCE WITH ALL OF THE PROVISIONS 
OF THESE LEASES AND LICENSES. FOR 
EXAMPLE, IN THE PAST YEAR, THIRTY 
ADJUSTMENTS TO INCREASE RENT, WHICH 
WERE PROVIDED FOR UNDER THE LEASE AND 
LICENSE AGREEMENTS, WERE NOT MADE ON A 
TIMELY BASIS." 



PORT'S RESPONSE 

All Port leases have been reviewed and 
updated as the Report states. All of 
the licenses will be reviewed for 
compliance in 1985/86. One of the 
Port's goals in its "Management By 
Objectives" (MBO) program for the 
current year is completion of 
compliance review of all its 
agreements. Any needed adjustments 
are now being made on a timely basis 
as a result of this effort. 



A UDIT STATEMENT 

SECTION III. 3: LEASE ADJUSTMENTS FOR 
RESTAURANT TENANTS 

"UNDER THE EXISTING PROVISIONS OF THE 
PORT'S LEASES WITH SOME OF ITS 
RESTAURANT TENANTS, THE PORT IS 
ENTITLED TO ADJUST THESE TENANT RENTS 
BASED ON AMENDING THE PERCENTAGE OF 
GROSS RECEIPTS EVERY FIVE YEARS. 
HOWEVER, THE PORT HAS NOT ADJUSTED 
THESE LEASES FOR EITHER OF THE 
FIVE-YEAR PERIODS BEGINNING IN 1980 
AND IN 1985. BY FAILING TO ADJUST 
TENANT RENTS IN 1985 AND IN 1980, THE 
PORT HAS LOST ESTIMATED REVENUES FROM 
THEIR RESTAURANT TENANTS OF AT LEAST 
$6 75,000 FROM THEIR RESTAURANT 
TENANTS. INCREASING RENTS TO ITS 
RESTAURANTS TENANTS, IN ACCORDANCE 
WITH THE PORT'S LEASE PROVISIONS, 
WOULD RESULT IN ESTIMATED INCREASED 
REVENUES TO THE PORT OF AT LEAST 
$380,000 ANNUALLY." 



P ORT'S RESPONSE 

The Report is again misleading in that 
not all of the 1975 restaurant leases 
allowed rental adjustments in 1980. 
The Report implies it is the Port's 
right to bring these leases up to the 
Port's "current rate" for new 
restaurants. In fact, each lease is 
different, and any adjustment is 
subject to the lease terms which 
define the geographic boundary of the 
survey area for the purpose of 
determining comparable rents, etc. By 
use of ambiguous terras and a reference 
to Fisherman's Wharf, the Report 
implies widespread delay in increasing 
restaurant rents at Fisherman's 
Wharf. Actually, only four 
restaurants in the Wharf area are at 
issue. The Report calculates "lost" 
revenue by using percentage rent 
standards that are the highest of any 
being charged. There is no evidence 
to document lost revenues, since a 
percentage rent survey may well 
indicate that no adjustment or a 
downward adjustment is appropriate. 
As the Report states, the Port has 
time to conduct a survey, adjust rents 
and collect any monies which may be 
due. This is a staff priority, and an 
automated "tickler" system will be 
used in the future. References to 
decisions reached by the Port 
Commission in 1980 are not relevant. 
These decisions were made by 
responsible parties after due 
deliberation on facts which showed no 
adjustment was justified at that time. 



-97- 



AUDIT . STATEMENT 
SECTION III. 4: 
FACILITIES 



LEASING OF PORT 



"THE COMMERCIAL PROPERTY DEPARTMENT 
HAS NOT AGGRESSIVELY ATTEMPTED TO 
LEASE THE PORT'S COMMERCIAL, 
INDUSTRIAL AND OTHER SPACE. IN 
CONTRAST TO A CITYWIDE VACANCY RATE OF 
APPROXIMATELY 13.4 PERCENT FOR OFFICE 
SPACE, THE PORT'S VACANCY RATE FOR 
OFFICE SPACE MANAGED BY PORT STAFF, IN 
CONTRAST TO THE PORT'S OFFICE SPACE 
MANAGED BY OUTSIDE DEVELOPERS, IS AN 
ESTIMATED 23.6 PERCENT. AS A RESULT 
OF VERY LIMITED MARKETING ATTEMPTS TO 
LEASE PORT FACILITIES, WE ESTIMATE 
THAT THE PORT HAS LOST AT LEAST 
$298,800 IN LEASE REVENUES DURING THE 
PAST YEAR FOR JUST TWO OFFICE 
BUILDINGS. BY DEVELOPING A SOUND 
MARKETING PLAN, WE ESTIMATE THAT THE 
PORT COULD INCREASE ITS PROPERTY 
RENTAL INCOME BY AT LEAST $3 75,828 
ANNUALLY." 



PORT'S RESPONSE 

The vacancy rate the Port has 
documented is approximately the same 
as the Citywide average (15%). The 
Report exaggerates the amount of 
vacant office space and the vacancy 
rate by a selective inventory and by 
eccentric standards that are illogical 
and contrary to norms in the real 
estate industry. The Report's 
inventory of Port-controlled office 
space does not include office space 
when it is occupied in conjunction 
with or adjacent to maritime 
operations such as ship repair, 
import-export or shipping lines — 
even though, when such space is 
vacant, it is marketed by the 
Commercial Property Department for 
office tenants. The audit team did 
not count Crowley Maritime' s occupied 
office space at Pier 9, but did count 
similar vacant office space in Pier 
35. The Report did not count 32,000 
sq.ft. of Port offices in the Ferry 
Building even though the Port vacated 
space on the first and second floors 
and is now renting to other tenants. 
The result is that the Report 
magnifies the vacancy rate by 
comparing it to a smaller total than 
actually exists. 



P ort's Detailed Response: 

T he Issue of Office Occupanc y 



The Port has twenty-four facilities which contain rentable office space 
under the Port's day-to-day control (i.e. this excludes office buildings 
operated by others on Port land such as Blue Shield or Roundhouse) . The 
total leasable office space in these facilities is 404,131 sq.ft. The 
total occupied is 344,452 sq.ft., and the total vacant is 59,679. Thus, 
occupancy is 85% and the vacancy rate is 15% (documentation on file at the 
Port). 



The S.F. Examiner (4/18/86) stated that as of April 1, 1986, the vacancy 
rate for the Financial District was 15.1%, with South of Market financial 
district at 22.7% and the Van Ness corridor at 23%. Therefore, the 
Report's conclusion that the Port would receive increased revenues by a 
reduction of its vacancy rate from the citywide average is meaningless. 
Further, considering the drop in rents for prime office space with 
superior location and amenities (from $28+ to low $20's per sq.ft. 
according to the Examiner article noted above) the Port has achieved and 
maintained exceptionally high office occupancy. 



-98- 



The Report's recommendation that the Port "market'* office space does not 
comport with the contradictory recommendation to put it out to bid. In 
today's marketplace, competitive bidding is a pointless and excessively 
time-consuming exercise. 

T he Issue of Area Available for Development 

This section of the Report states that the Port has 908,109 sq. ft. of 
vacant sites and buildings that could be developed for light industrial or 
similar uses. Yet this total number includes the 434,000 sq. ft. referred 
to in Section I. After exclusion of the 300,300 sq.ft. under environmental 
review for a maritime warehouse center, exclusion of other buildings that 
can not be rented, and exclusion of 289,136 sq.ft. under the control of 
the Redevelopment Agency under a long-term lease, the accurate total is 
about 146,729 sq.ft. 

The Report attempts to perpetuate the myth that the Port has many 
development sites that are lying fallow due to inept management. The 
"value" of land obviously depends on what development or uses are 
allowed. For example, the waterfront Promenade represents 1,600 feet of 
Bay front land. It is dedicated to open space under the City's Northeast 
Waterfront Plan, the BCDC Special Area Plan, and the Board's adopted South 
Beach / Rincon Point Redevelopment Plan. What is its "value"? 

T he Issue of How Port Pursues Commercial Property Development 

The Port uses the financing provided by developers under long-term leases 

to accomplish development of surplus property. The leases provide that 

the Port participates in the profits from these developments receiving a 

minimum rent plus "percentage rents" based on the profitability of the 

development. This has been standard practice for many years. 

Many parcels have been or are being developed on this basis, including 
seawall lots (inland of the Embarcadero) that contain developments such as 
the Blue Shield building, Francisco Terraces, Roundhouse Plaza, 900 Front 
St, Fog City Diner, etc. Others, such as at Fisherman's Wharf and 
Pier 39, have been developed on pier coverage. Most commercial property 
leases require the tenants to maintain the substructure and site in good 
condition. Maintenance is not the Port's responsibility, and the lease 
return reflects this arrangement. 

A team of Port staff, including the finance director, property manager, 
planning and legal staff, and outside consultants, follow a policy of 
offering property for major development in a planned sequence. A schedule 
for these offerings has been developed under the leadership of the current 
Executive Director. 

The first offering was Seawall Lot 318, leased as an adjunct to the 
rehabilitation of the Magnin building. The second was Piers 1-1/2, 3 and 
5, including the refurbishment of three historic bulkhead buildings and a 
new office building with almost 80,000 sq. ft. of public plazas. The 
current offering is the Pier 45 Hotel and Hyde St. Pier commercial fishing 
complex, now published and distributed as a Request for Qualifications. 
The next offering will be Seawall Lot 314 (Bay at the Embarcadero). 
Following this will be Pier 24. The preparation and subsequent 
negotiation of these offerings are proceeding in a timely fashion. 



-99- 



The Issue of Land Use Restrictions 



Many of the sites that the Report refers to as unused or underutilized are 
designated by BCDC for Port Priority, Maritime and Seaport development. 
Port property can not be developed for the traditional "highest and best" 
use. The obstacles are primarily the land use restrictions imposed by the 
State Lands Commission, BCDC, City zoning and master plan, etc. As a 
consequence of numerous court cases and interpretations, these lands can 
not be developed for residential or general office space. 

Since land use restrictions are "invisible" controls on what can be done 
with Port property, it is easy to disregard their importance in governing 
what can be built, and, in turn, the profitability of the potential 
development. The Port is the trustee of these lands for the State of 
California. The public trust doctrine, embodied in the State's 
constitution, requires that Port lands be used for purposes of statewide 
importance and not for purely private purposes. 

The State Lands Commission has made it very clear to the Port that it is 
not permissible to develop "general" office space unrelated to the conduct 
of water-borne commerce or purposes of statewide importance (see People vs 
California Fish Company and City of Berkeley vs Superior Court). The SLC 
requires that the Port and potential developer submit criteria for 
"qualified" tenants prior to beginning a project, and that they 
demonstrate a demand by such qualified tenants for 150% of the space to be 
built. 

The Issue of the Property Department as a "Passive Money Collector " 

The Report states that the Commercial Property Department is currently 
like a passive money collector with staff that is there merely for the 
maintenance of accounts. This is completely false. Over a two-year 
period (April 1984-March 1986) the Commercial Property Department has: 

Negotiated and Processed 266 new rental agreements. 

Booked and Coordinated 37 special events at Piers 35 and 45. 

Issued and Monitored 42 filming permits. 

Increased annual billings by more than $750,000 through lease 

rental rate adjustments (CPI's and others). 
Increased annual billings on existing licenses by more than 

$635,000 through scheduled rate adjustments. 
Increased rates for parking stalls by 15 to 35%. 
Developed and commenced implementation of a plan for 

installation of 300 new parking meters. 
Assisted in collection of several hundred thousands dollars 

in delinquent accounts. 
Audited 117 leases and corrected compliance deficiencies 

discovered thereby, resulting in collecting over $175,000 in 

back payments of rent. 
Corrected many squatter/encroachment problems by evicting 

illegal users or securing payment for, the space (including 

pproximately $70,000 in back payments). 
Secured several facilities which had a history of 

squatter/vagrant problems, including Piers 1, 1-12, 3, 5, 

7, 33, 66 and several southern waterfront seawall lots. 

Continued, next page 



-100- 



C ontmercial Property Department's Accomplishments, continued 



Developed or formalized policies and/or procedures for: 
. Space rental (licensing & leasing) 
. Termination of tenancies 

. Special events rentals or Piers 35 and 45 

. Approval of tenant signs 

. Tenant insurance requirements 

. Checklist for monitoring performance of contract janitors 

and security guards. 
. Work orders 

. Monthly Rental report through which billing errors are 
discovred and corrected. 
Worked with other City departments to establish policies and 

procedures to deal with problems such as pedicabs, street 

performers, street vendors, squatters, vagrants. 
Designed and commenced implementation of computerized 

vacancy reports, tickler systems and lease abstracts. 
Contributed significantly to development of Redevelopment 

Agency Lease/Option, Piers 1-1/2, 3 and 5 Lease/Option and 

developer selection, and Pier 45 RFQ/RFP. 



RECOMMENDATIONS ALREADY IN PROGRESS AT THE TIME OF THE REPORT 

Many Report recommendations are for actions or improvements that have been 
under way for some time. These include: 

a) Development of a new collections policy (completed); 

b) Conversion of electric service to PG&E (on-going since 1972); 

c) Extensive use of monthly management financial reports; 

d) Compliance review of all tenant leases; 

e) Development of an automated facility cost/revenue program; 

f) Reorganization of MIS Department resulting in a 100% increase in 
productive output and elimination of outside consultants; 

g) Completion of procedures manuals for purchasing and personnel; 
development of manuals for leasing and payroll; 

h) Use of "tickler" files for lease compliance/adjustments; 

i) Auditing of shipping contracts through manifests; and 

j) Use of short-term leases rather than licenses for non-conforming uses 
in maritime reserve areas. 



-101- 



RECOMMENDATIONS WITH WHICH WE CONCUR 



, The report contains many useful recommendations. We concur with the 
recommendations in the following areas: 

a) China Basin Houseboat Community; 

b) Fireboat; and, 

c) Provision of Electricity. 

Conversion of electrical service to PG&E has been Port policy and an 
on-going effort since the early 1970' s. Staff has met with the Mission 
Creek Harbor Association and is in the process of finalizing lease terms 
for Port Commission approval. At Port staff's urging, the Harbor 
Association has been made a co-applicant on the Bay Conservation and 
Development Commission permit for the project. This places compliance 
responsibility on the Association. 



-102- 



PORT LAND LABELED "UNUSED OR UNDERUTILIZED" IN THE AUDIT STATEMENT 



Actual Land Use Disposition and Availability for Development 



Facility 
Pier 98 



Pier 96 



Location (between) 

South end of Cargo Way 
and India Basin 



Cargo Way and Bay at 
Jennings Street 



SWL 352 



Cargo Way and Pier 94 
and Islais Creek 



SWL 344 



Cargo Way and Piers 90/92 



PORT'S RESPONSE 

Spit of land created for proposed 
"Southern Crossing" bridge. Considered 
illegal fill by BCDC; BCDC could require 
its removal at great cost. Instead Port 
proposed 4 acres for maritime/terminal 
and 11 acres for public access/habitat 
as part of "mitigation" required for 
terminal expansion permit. BCDC OK'ed. 

Admittedly a vacant office building 
within the terminal. All of the area 
referred to is part of terminal dev- 
elopment area. 100-foot strip would 
not be developable even if it was 
available, due to set-back, off-street 
parking and loading requirements. 
This is a totally unrealistic site 
for development unrelated to terminal. 
All this area is designated under BCDC 
Plan as "Port Priority" only. 

Site is not available for "mixed use" 
development; site is a BCDC-designated 
Seaport site and Port Priority area. 
Adopted master plan and EIR call for 
container terminal expansion here. 
BCDC permit could not be obtained for 
non-maritime use. "Natural" state is 
Bay waters. 

See above. Development recommendations 
totally ignore BCDC limitations on use. 
Area is designated Port Priority. 
Current uses are in support of 
maritime activities. 



Islais Crk 
SWL 354 
Piers 84, 
86, 88 



Marin and Islais Streets 



Islais Street is waterway and a 
street on paper only. Area does need 
cleanup. Port holds a BCDC permit 
to use south side of channel for 
rail trestle alignment to access 
Piers 94-96 and ICTF. In the Bay 
Plan this area is designated for 
public access and does not have 
development potential. Again, 
verify with BCDC at 557-3686. 



*The reference to this facility was deleted from the Budget Analyst's report, 



-103- 



F acility 
* Pier 80 



SWL 349 



Location (between) 

Marin, Army and Twenty- 
sixth Streets & Illinois, 
Michigan, Maryland and 
Massachusetts Streets. 



Twentieth and Twenty- 
second Streets and Pier 
and Port's shipyard 
facility used by Todd. 



70 



PORT'S RESPONSE 

This is not Port property; it is * 
WP/UP (Upland) railyard. The Pier 
80 building does have some space 
for lease. 

Perception that this is Port land 
should be corrected in report. 

Pier 70 Container Freight Station 
(CFS) and warehousing center are 
under environmental review. The 
bulk of the site is a BCDC- 
designated "Near Terra" Seaport 
site. Call BCDC (557-3686) and 
inquire about the "mixed use" 
development potential. We did. 



SWL 345 Illinois, Mariposa and 

Piers 64 China Basin Streets 

and 54 extending to Pier 50 



Disagree unused and underutilized; 
small boat repair uses in demand. 



SWL 343 Illinois and China Basin 

Streets near Mariposa 
Street 



Property leased to production and 
sales uses, in addition to parking. 



China 
Basin 



Channel and Berry Streets 



Port-owned sixty-foot strip has 
little, if any, development 
potential. Mission Bay project 
is being planned for 200 acres 
of surrounding private land. 
In all alternatives, channel is 
dug out and greatly enlarged thus 
eliminating any "land" areas 
that now exist. This is being 
done at the insistence of the 
"public" through the City Planning 
Department's process. 



SWL 336 Berry, Third Streets and 

Pier 46B China Basin 



Building houses Port Maintenance 
Department, Belt Line storage and 
industrial users. Cost to relocate 
Maintenance Dept. is under study. 



SWL 335 Embarcadero and: 

SWL 334 Berry Street 

SWL 333 Berry, Second and King 

SWL 332 Townsend 

SWL 331 First and Brannan 

Pier 40 Fremont and Brannan 
King Street 



South Beach project of the Redev- 
elopment Agency. The Port has not 
had control over land uses here 
since the Board of Supervisors 
designated it a Redevelopment 
Area. This was a Board, not a Port, 
decipion. Redevelopment Agency 
has funding sources, such as CBDG 
and tax increment financing, that 
are not available to Port. 



*The 



reference to this facility was 



deleted from 
-104- 



the Budget Analyst's report. 



F acilit y 



Location (between) 



PORT'S RESPONSE 



SWL 330 Embarcadero and: 

SWL329 Beale and Bryant 

Main and Bryant 



Scheduled for future development. 
Staff has received and is con- 
sidering two development proposals 
that involve an international 
trade fair/exhibit. City is trying 
to limit development potential by 
reducing height limit from 105 ft. 
to 40 ft. 



Pier 34 



Brannan Street 



If rebuilt, under BCDC regulations 
would have to be "water dependent" 
use with proof of "no alternative 
upland location". 



Pier 30/32 Brannan and Bryant Streets 



Being rebuilt for container freight 
station (CFS), cold storage and 
centralized customs. Has undergone 
environmental review; BCDC permit 
filed in March. Design contract 
awarded by Port Commission. Con- 
struction to begin late 1986 or 
early 1987. 



Pier 24 



Harrison Street 



Designated for mixed use, community- 
oriented retail, recreation and 
public access/assembly in BCDC and 
City's master plan. However, 
structure would have to be rebuilt, 
and on rebuilt structure BCDC would 
not allow the planned uses. 



SWL 328 



Bryant and Harrison 



SWL 328 is on a long-term lease to 
owners/developers of adjacent 
building (Magnin Bldg.) which is 
not on Port property. Port has re- 
capture rights. 



SWL 327 Steuart and: 

SWL 348 Folsom 
SWL 34 7 S Folsom and Howard 

SWL 34 7N Howard 
Howard 



327 and 348 to be used as a park by 
the Redevelopment Agency. SWL 34 7N 
is under license to developers of 
adjacent parcel where they have 
built a public plaza and placed 
a sculpture and fountain. SWL 34 73 
is leased to State for parking. 



Agriculture 
and Ferry 
Buildings 



Mission and Market Streets 



Buildings are occupied by long 
term tenants (World Trade Club; 
Limbach, Limbach & Sutton) , Port 
offices and by numerous offices. 
Port agreement with Continental 
Development Corp. for rehab of 
buildings did not allow Port to 
enter into leases. 



*The reference to this facility was deleted from the Budget Analyst's report. 



-105- 



Facility Location (between) 



PORT'S RESPONSE 



Piers 1-1/2, Washington and Broadway 
3 ,' and 5 



SWL 351 



Washington and Jackson 



Developer selected in August 1985. 
Port staff and developer working 
with BCDC and State Lands to get 
project underway. 

Site has a gas station and parking 
uses on a lease with ten years 
remaining . 



Pier 9 



Vallejo Street 



Waterfront headquarters of Crowley 
Maritime tugs and water taxi. Base 
of operation for the Bar Harbor 
pilots and Inland pilots. Also long- 
term office uses with 30-day 
termination due to DCP limitations. 



SWL 324 Davis, Broadway, Vallejo 

SWL 323 Davis, Vallejo 

SWL 322-1 Front, Broadway and 
Vallejo Streets 



SWL 324 on long term lease to 
Victoria Station restaurant. SWLs 
324 and 322-1 are cut in half by 
Embarcadero freeway ramps. Develop- 
ment potential would be doubled with 
freeway removal. SWL 322-1 has a gas 
station and parking uses. 



SWL 321 
SWL 320 



Green Street 
Union Street 



SWL 321 under development agreement 
with office developer. Project has 
EIR and all required approvals. SWL 
319 is site of Fog City Diner, one 
of Port's most lucrative uses. 



Pier 27/29 



Lombard and Chestnut 
Streets 



True. 



Pier 33 Bay Street, Northpoint 

Street, Embarcadero 



Center for the herring fleet and 
related commercial fishing uses. 



SWL 314 Bryant and Northpoint 

Streets 



Lease expires in 1987. Port has 
begun process of putting out to 
bid using consultants to prepare 
development scenarios and do the 
EIR "up front". 



Fishermans 
Wharf 



Pier 45 has been advertised for 
developer interest (RFQ released 
in March 1986) to build hotel and 
public assembly/research facilities. 
Pier maintenance under long-term 
leaseholds is tenant responsibility 
and factored into lease terms. 



Embarcadero 
and Belt line 



Land is already planned to be part * 
of Embarcadero/Muni . No basis to 
claim right-of-way could be "very 
valuable" to Port since the Burton 
Act reserves to the State any lands 
needed for roadway improvements. 



*The reference to this facility was deleted from the Budget Analyst's report. 

-106- 



WRITTEN RESP0h4SE OF THE FIRE DEPARTMENT 



BOARD OF SUP ERVISORS 
BUDOil ANALYSI 



CITY AND COUNTY OF SAN FRANCISCO 



SAN FRANCISCO FIRE DEPARTMENT 



EMMET O. CONDON, 6iiitfof^epaTtmenl 
CHARLES D. Z\K^SZ\,°^cputf> 6iticf...(^pcrations 
ROBERT E. ROSE. °-d)q)Utp &tief...AJmimstration 




SAN FRANCISCO. CALIFORNIA. 94102 



(415) 861-6000. EXTENSION 281 



2«0 GOLDEN GATE AVENUE 



April 29, 1986 



Mr. Harvey Rose 

1182 Market Street, Suite 422 

San Francisco, CA 

ATTEN: Ms. Debra Newman 

RE: Harvey Rose Report - Fireboat Phoenix 
Dear Mr. Rose: 

In reference to your report to the Board of Supervisors, Section IV. 2: 
Fireboat - we would like to make reference to several discrepancies 
in the report. 

First, Page 59 states that there is a crew of 10 - This is of course, 
true except that one of the lieutenants is a Swing officer and shares 
his tours among several other companies. 

Page 60 lists use of fireboat and lists as "//6. Providing ceremonial 
water displays". This is not a primary function of the fireboat but 
rather a courtesy supplied by the City of San Francisco for ceremonial 
occasions. The fireboat is not "out of service" during such displays, 
but is "available for response". No credit for service is taken 
during such displays. 

Where there is a statement regarding fireboat responses, the follow- 
ing statements are made: 

"Based on the Fire Department's monthly tabulations of all 
fireboat responses between January 1981 and December 1985, we 
found that the fireboat responded to an average of 1.22 calls per 
month, requiring an estimated 1.77 hours of operation per month. 
This equals approximately one and one-half hours per response per 
month during 1981, 1982 and 1983. Subtracting the number of false 
alarms, rescues and ceremonial uses of the fireboat, the fireboat 
was used an average of 0.8 times, or less than once per month to 
fight fires on vessels or along the yaterfront in 1981, 1982 and 
1983. Comparatively, in 1984 and 1985, the fireboat was in ser- 
vice an average of 4.8 times per month; the average for fire- 
fighting calls only was 1.8 times per month.* The asterisk stated 



-108- 



t-T J 
t 



Mr. Harvey Rose -2- 4/29/86 



"these data do not include calls for the fireboat to be on standby 
or instances in which the fireboat is recalled back to its berth 
because land based engine companies are used instead". 

The figures as used in the report, do not reflect the figure taken 
from the San Francisco Fire Department Comand & Control (CAD) 
Computer Assisted Dispatch system, out of monthly service. The 
figures from the Computer Assisted Dispatch system were compiled 
starting in January 1983 through to March 1986. 

We have listed these figures as well as averages: 

Total Emergency Response: 638 

For 39 month period: 16.4 runs per month 

(If 8 Greater Alarms and 37 Special Calls are included - 
this will average out to 17.5 runs per month) 

Total Hours Service: 174.1 

For 39 Month period: 4.5 hours per month 

Total False Alarms: 303 

For 39 month period: 7.8 false alarms per month 

(This leaves 8.6 runs per month for this 39 month period - 
638-303 = 335 runs) 



For this 39 month period or adding 8 Greater Alarms and 37 
Special Calls: 380-t 39 = 9.7 runs per month. 

All Fire Department figures consider all alarms responded to other 
than False Alarms as legitimate working figures. These percentages 
are quite uniform for a number of our companies. Why the criteria 
of removing rescue calls was set by your figures ir,. much a mystery. 
Rescue calls are legitimate calls. Standby service is still con- 
sidered as service and is often a judgment of the Chief Officer 
of not tying the fireboat up when it might be better employed as 
"available for response". As stated above, the computer gives no 
credit for ceremonial displays so our figures do not reflect this 
as service. 

As you have stated it is the San Francisco Fire Department's opinion 
that due to the deteriorated conditions of a number of structures on 
the port; the increase in shipping recently; the improved outlook 
for business with the Port of San Francisco; and the increased use 
of the San Francisco Port by the United States Navy, there would be 
a negative impact by the reduction in any way of fireboat service 
to the Port of San Francisco. 



-109- 



Mr. Harvey Rose -3- A/29/S6 



The Fire Department has no objections to a study of the fireboat's 
use to the port by experts. The Fire Department of course, reserves 
the right to complete a study of its own to answer any study done by 
an independent consulting firm. 

If you have any questions, please call me at 861-8000, extension 245. 

Very truly yours, 

r 

Edward/ 
Deputy Chief 
Administration and 
Support Services 




-110- 



/ EXECUTIVE DIRECTOR'S WRITTEN RESPONSE 

TO 

MANAGEMENT AUDIT OF THE PORT OF SAN FRANCISCO 




(REPORT TO THE SAN FRANCISCO BOARD OF SUPERVISORS 
BY THE BUDGET ANALYST) 



MAY 1986 



INTRODUCTION 



The Budget Analyst's Management audit of Port of San Francisco operations is 
disappointing and misleading in several respects. 

Despite extensive comments offered by Port administrative staff following 
review of two earlier drafts of this report, the version given to us for final 
review still contains numerous self-contradictions and errors of fact, and it 
continues to reflect a serious lack of understanding of the legal, political, 
and economic environments in which the Port must operate. 

Among its many inadequacies, the following stand out*: 

o Vacancy rate is miscalculated — The Budget Analyst's report 

erroneously claims a vacancy rate of 23.6 percent (page 50) for Port 
properties, which it further claims is far above the vacancy rate in 
the City as a whole. In fact, the Port has only 60,000 square feet 
of office space vacant, out of a total of 404,000 sq. ft. available, 
for a vacancy rate of 15 percent, which is comparable to that of the 
Financial District and better than that of many of the City's 
business areas. 

o Commercial value of Port property is not understood — The report's 
projection of $100 million in annual revenues from commercial 
development (page 12) is based on a mix of faulty logic and an 
unsubstantiated valuation of Port property at $1 billion. The market 
value of a given parcel of land is directly related to what can be 
built on it. Correspondence between the Port and such legally 
empowered regulatory agencies as the Bay Conservation and Development 
Commission (6CDC) and the State Lands Commission makes it clear that 
some of the things specifically recommended by the Budget Analyst's 
report are prohibited (the recommendation to build a mixed-use 
development on Pier 80, for example). 

o Cost estimates are inconsistent — On Page 2, the report states that 
the cost to implement all of its recommendations would be "$50,000 
annually, plus $58,533 in one-time costs." On page 17, it states 
that "implementation of this recommendation would require the Port to 
spend an estimated $20 million annually over 10 years and would 
require a significant undetermined amount of capital investment and 
personnel cost." 



We cannot be certain our comments will correspond item for item with the 
report as released, since the Budget Analyst has reserved the right to 
alter the final report should our final written response prove persuasive. 



-i- 



o ReneRotiation of lonR-tetTn leases is unlikely — Several restaurants 
in the Fisherman's VJharf area, holders of extremely favorable leases 
that do not expire until well into the next century (all of them 
dating back 10 to 15 years), have entered into short-term agreements 
with the Port for small parcels of adjacent property. The Budget 
Analyst appears to hold the opinion (page 42) that these leaseholders 
would be willing to renegotiate their long-term leases on terms more 
favorable to the Port in order to protect the smaller parcels now 
held on month-to-month terms. We consider that prospect unrealistic 
at best. 

From these few points, and a great many others contained throughout the 
report, it is apparent that the auditing team of the Budget Analyst's office 
does not have a firm grasp of the realities of managing Port lands. And the 
report fails repeatedly to perceive the significance of the fact that these 
lands do not belong to the City of San Francisco but are, in fact, state-owned 
lands over which the Port exercises stewardship under elaborate constraints. 

The Port's actions are regularly and closely scrutinized by such agencies as 
BCDC, the State Lands Commission, and the U.S. Army Corps of Engineers, to 
name but a few of the local, state, and federal jurisdictions in which we 
operate. Each has its own view of what is best for the waterfront, each 
interprets and administers the various laws governing the Port's activities, 
and all must be taken carefully into account in virtually everything the Port 
undertakes. The audit does not recognize these political and legal realities, 
and in effect lightly brushes them aside. 

Nor do the auditors seem familiar with the maritime industry or the City's 
commitment to it, as expressed on numerous occasions by Mayor Dianne Feins tein 
and endorsed by an overwhelming majority vote for a $42.5 million bond issue 
to revitalize the Port's maritime operations. 

There are, of course, some recommendations of merit in the report. However, 
many of them already have been, or are in the process of being, implemented. 

The Port of San Francisco is arguably the City's greatest single asset. From 
the colorful and historic fishing industry at Fisherman's Wharf to the 
blue-collar employment centers along the industrial southern waterfront. Port 
facilities are among the most visible and productive resources in the City. 
Proper management of these resources demands a professional knowledge of all 
the markets they serve, as well as a thorough understanding of the existing 
political, legal, and economic environments in which they must be operated. 

On each of these requirements, we find the Management Audit to be deficient. 



-11- 



3 1223 05722 8828 



AUDIT STATEMENT 

SECTION I.l: STRATEGIC PLANNING 

"THE PORT HAS SOME OF THE MOST 
VALUABLE PROPERTY ON THE WEST COAST. 
HOWEVER, OVER THE YEARS THE PORT'S 
MANAGERS HAVE NOT DEVELOPED AN 
INTEGRATED PLAN IN ORDER TO USE THE 
PORT'S COMMERCIAL PROPERTY RESOURCES 
TO FINANCE THE DEVELOPMENT OF 
FACILITIES FOR THE MARITIME AND 
FISHING INDUSTRIES. WHILE THE PORT 
HAS MADE VARIOUS ATTEMPTS TO DEVELOP 
SOME OF ITS PROPERTY FOR COMMERCIAL 
USE, AND WHILE STATE REGULATORY 
AGENCIES HAVE HINDERED THESE ATTEMPTS, 
THE PORT HAS NOT BEEN AS AGGRESSIVE IN 
THE DEVELOPMENT OF ITS PROPERTIES FOR 
COMMERCIAL USES AS IT HAS BEEN IN 
DEVELOPING ITS PROPERTIES FOR THE 
SHIPPING INDUSTRY. AS A RESULT, AT 
LEAST ONE MILLION SQUARE FEET OF PORT 
PROPERTY IS EITHER UNUSED OR 
UNDERUTILIZED. FOR EXAMPLE, FOUR 
FACILITIES ON PIERS 27/29, 70, 80 AND 
94/96, WHICH HAVE BEEN VACANT FOR OVER 
ONE YEAR, CONTAIN OVER 434,000 SQUARE 
FEET OF OFFICE AND INDUSTRIAL SPACE. 
BASED ON A TEN PERCENT GROSS REVENUE 
RETURN ON THE ESTIMATED PROPERTY 
VALUE, THE DEVELOPMENT OF ALL PORT 
PROPERTY, CURRENTLY VALUED AT AN 
ESTIMATED $1 BILLION, COULD RESULT IN 
AN ESTIMATED $100 MILLION IN MINIMUM 
ANNUAL REVENUES TO THE PORT WITHIN 
TWENTY YEARS, OR OVER $70 MILLION MORE 
THAN THE PORT'S CURRENT ANNUAL RENTAL 
REVENUES OF $29.3 MILLION." 



PORT'S RESPONSE 

The Port, City and BCDC have an 
integrated plan for development of 
Port land to finance the maritime and 
fishing industries. Port projects 
have produced a steadily increasing 
profit since the years the Port faced 
financial crisis. Revenues are 
produced by five major office 
buildings, numerous restaurants, 
retail businesses. Pier 39 and office 
rentals. With this income and an A-1 
bond rating, the Port sold a $42 
million bond issue to finance maritime 
and Fishermans's Wharf improvements. 
More projects are in the pipeline on 
Piers 3 and 45 and four other northern 
waterfront parcels are planned for 
development. The Report suggests the 
Port should have built on its 
properties whatever a private 
landowner would build and failure to 
do so shows a "limited enthusiasm". 
In fact the State Constitution, 
legislative acts and regulatory 
restraints prohibit such land uses. 
The value of Port land is directly 
related to the permitted uses. The 
report states, due to land use 
restrictions, "... the Port must put 
all development to low revenue 
producing maritime purposes or do no 
development at all . . . . " and then the 
Report is critical of the Port doing 
what they say we must do! The actual 
vacant space in the areas referred to 
is 36,050 sq.ft., not 434,000 as the 
report erroneously states by counting 
300,300 sq.ft. now under environmental 
review and two other unusable sites. 
The report provides no substantiation 
of the value of Port property. The 
$70 million increase in revenues the 
report says the Port could achieve in 
twenty years would be achieved solely 
through eight percent annual growth 
and escalation with no new development. 



Port's Detailed Response; 

The Issue of Real Estate. Regulatory and Maritime Context 

The Report did not examine or understand the real estate, regulatory or 
maritime context of Port property. Notable omissions in the list of 
agencies interviewed are the Bay Conservation and Development 
Commission (BCDC) and the State Lands Commission, the two agencies with 



-1- 



primary regulatory control over Port land. The report suggests that the 
Port has not been aggressive enough with these agencies, while in fact 
the present administration more than any previous leadership has made a 
priority of working to resolve the conflicting directives and land use 
policies governing the Port. 

The Port does not "invent" these restrictions (see the McAteer-Petris 
Act; Public Resources Code; Planning Code, Section 240.1). Under Section 
6306 (b) of the Public Resources Code as well as the Burton Act, it is 
clear that all revenues received from these trust lands shall be expended 
only for those uses consistent with the public trust for commerce, 
navigation and fisheries. Regulatory agencies have advised that the land 
use and development choices are strictly limited. The Port supports 
legislation or amendments modifying existing constraints so that 
reasonable development can take place. 

The Port is also subject to the leasing, land use, and environmental 
authority of the Board of Supervisors, City Planning Commission, U.S. Army 
Corps of Engineers, Regional Water Quality Control Board, Fish and Game, 
Coast Guard, and other agencies. Maritime development must provide 
public access to the shore and cause minimal impacts to the Bay. 
Non-maritime developments must pay for and maintain large areas of public 
access, as well as pay the fees imposed by the City for transit, etc. 

The Issue of Accomplishments 

It would be hard to find a more constrained business and regulatory 
environment within which to work. In this context, it is remarkable that 
the Port has effectively pursued so many worthwhile projects. A partial 
list includes: 

North and South Container Terminal modernization 

Intermodal Rail/Container Transfer Facility (ICTF) design and development 

Fisherman's Wharf Breakwater legislation, funding and implementation 

Jefferson St. Seawall funding, design and completion 

Commercial fishing berth improvements (power, water, ladders) 

Pier 30-32 Cold Storage and Container Freight Station development 

Pier 70 Warehousing and Container Freight Station planning 

Roundhouse Plaza leasing agreement 

Pier 7 Public Fishing Pier design, funding and grant applications 
Pier 45 Hotel and Hyde St. Pier commercial fishing project 
Piers 1-1/2, 3, and 5 offering and developer selection 
Waterfront Promenade funding and completion 

The Issue of Conflicting Land Use Directives 

The Report states that the Port "falters" when a difficulty is 
encountered in the planning or regulatory process. This is untrue. For 
example, in order to expedite processing of Port environmental review 
through the City Planning Department, the Port has paid the salary of 
Environmental Review staff to augment departmental resources. Port staff 
also has an excellent relationship with BCDC staff, and this cooperation 
has resulted in expedited permit review. No examples of the "faltering" 
are given in the report. 

As an example of the conflicts in planning done by outside agencies, Pier 
45 was designated for housing in 1981 - a use explicitly prohibited under 



-2- 



the public trust doctrine of the State Lands Commission. The current 
Port administration formed a civic advisory group, redefined the land 
uses, and is moving ahead with a new pier and berthing for commercial 
fisheries and a hotel and public assembly uses on Pier 45. In another 
example, Pier 24, designated by planners for mixed use development, is in 
poor structural condition and has to be rebuilt. Rebuilding can only be 
permitted if the uses are water-oriented under the McAteer-Petris Act 
(BCDC legislation) and cannot be for office or commercial use. This is 
an example of a "self-cancelling" land use policy that the Port inherited 
and is working to change. 

On the southern waterfront, BCDC/MTC Seaport Plan designates "Near Term" 
and "Long Term" container terminal sites, and BCDC will only permit 
interim uses in these areas. On Port land there are four such sites 
which consist of hundreds of acres of Port and privately owned land. 
When the Port wanted to put a ship repair operation at Pier 50 under a 
long-term lease, it was precluded from doing so by BCDC. This operation 
was limited to five years and may not be renewed without a commitment to 
relocate. But it presently returns to the Port $750,000 annually. 

The Issue of "Sound Business Management" 

We share the report's concern for the ability of the Port to fund needed 
improvements to its facilities and infrastructure without relying on the 
General Fund. However, the Report dwells on old issues and decisions of 
past administrations perpetuating myths about poor management. The 
Report ignores a ten-year record of increasing financial strength, 
professional staffing changes, upgrading of bond rating from Bbb to 
"A-1", reduction in accounts receivable and favorable management letters 
from its outside auditors. 

The Port has been brought from the threat of bankruptcy in 1976-77 to a 
strong financial position at present, with a net income of $5.8 million 
in 1985. This could never have been accomplished without professional, 
business-like management. The Report has numerous references to past 
decisions which the present management cannot change. Yet the Port must 
still deal with the consequences of those decisions. 

The Issue of Use of Private Developers 

The Port has used the financing provided by developers under long-term 
leases to accomplish development of surplus property which has been very 
attractive to private investment. The Report suggests such an approach 
as if it were a wholly new idea. This has been Port Commission policy 
for many years as outlined in Maritime Strategy II. The leases provide 
that the Port participates in the profits from these developments, 
receiving a minimum rent plus "percentage rents" based on the 
profitability of the development. This has been standard practice for 
many years. 

The Issue of Costs to Implement Report Recommendations 

The introduction to the report estimates the cost to implement the 
Report's recommendations at $50,000 annually plus $58,539 in one time 
costs. But the body of the Report states that one recommendation alone 
would cost $20 million annually for ten years and an undetermined amount 
of capital and personnel cost. The Report underestimates the costs and 
exaggerates the gains to be achieved by implementing its recommendations 
but does nothing to substantiate its projections. 



-3- 



AUDIT STATEMENT 

SECTION 1.2: FACILITY ACCOUNTING 

"SINCE THE PORT DOES NOT ALLOCATE 
REVENUES AND EXPENDITURES TO ITS 
SPECIFIC FACILITIES, THE PORT DOES NOT 
KNOW EITHER THE COSTS OF ITS SPECIFIC 
FACILITIES OR WHETHER THESE FACILITIES 
ARE OPERATING AT A PROFIT OR A LOSS. 
AS A RESULT, THE PORT IS NOT ALWAYS 
ABLE TO OPERATE IN A BUSINESSLIKE 
MANNER. WITH THE LACK OF THIS BASIC 
COST INFORMATION, THE PORT IS HAMPERED 
IN MAKING SOUND DECISIONS AND DOES NOT 
KNOW IF THE EXPENDITURES MADE AT A 
SPECIFIC PORT FACILITY ARE JUSTIFIED 
BY THE REVENUES GENERATED BY THAT 
FACILITY. FOR EXAMPLE, THE PORT DOES 
NOT KNOW THE MAINTENANCE COSTS OF 
EITHER FISHERMAN'S WHARF OR OF PIERS 
94/96." 



PORT'S RESPONSE 

The Port has a plan to implement, 
within nine months, an automated cost 
accounting system that will provide 
revenues and expenses by facility. 
This is not a new idea, but one that 
current staff initiated. The Port is 
awaiting approval by the City of its 
data processing plan essential to this 
effort. Revenue and direct expense 
information by facility is currently 
available. The Port's favorable 
management letters from its outside 
auditors, improved bond rating, 
coupled with its increase in revenues, 
additional shipping lines and 
development agreements do not 
substantiate the Report's charge of 
not operating in a sound, businesslike 
manner . 



AUDIT STATEMENT 

SECTION 1.3: COLLECTION PROCEDURES 

"THE PORT'S ACCOUNTING DEPARTMENT HAS 
INADEQUATE POLICIES WITH RESPECT TO 
THE COLLECTION OF THE PORT'S 
DELINQUENT ACCOUNTS RECEIVABLE OWED BY 
ITS TENANTS. THE PORT CURRENTLY HAS 
DELINQUENT ACCOUNTS AMOUNTING TO $3.68 
MILLION INCLUDING SOME ACCOUNTS THAT 
ARE OVER TWO YEARS OLD. AS OF MARCH, 
1986, NINE TENANTS OWE THE PORT IN 
EXCESS OF $1.6 MILLION AND HAVE BEEN 
IN ARREARS FOR OVER 60 DAYS BEYOND THE 
DUE DATE FOR THESE PAYMENTS. THE PORT 
HAS WRITTEN OFF BAD DEBTS OF OVER 
$700,000 IN 1985, AND OVER $400,000 IN 
1984. AS OF 12/31/85, 63.2 PERCENT OF 
THE PORT'S ACCOUNTS RECEIVABLE WERE 
PAST DUE BY 90 DAYS OR MORE. REVISING 
PORT COLLECTION POLICIES AND 
INCREASING TENANT SECURITY DEPOSITS 
WOULD INCREASE PORT REVENUES BY AT 
LEAST AN ESTIMATED $40,000 ANNUALLY." 



Port's Detailed Response: 
Continued, next page. 



PORT'S RESPONSE 

The Port has an aggressive and well 
documented Collection Policy. It 
compares favorably to similar ones in 
private industry and other City 
departments. In the last three years 
the Port's receivables decreased from 
$5.6 million to $3.5 million, accounts 
60 days past due decreased from 367 
accounts to 192, accounts receivable 
as a percentage of six-month sales 
decreased from 44% to 24%. The nine 
accounts over 60 days are in the City 
Attorney's hands for collection. Four 
of these are facility damage claims, 
not delinquent rents. One, Roundhouse, 
is a rent deferral approved by the 
Board of Supervisors. Collections 
policies will not change accounts in 
litigations. The $700,000 written off 
in 1985 was 2.4% of total operating 
revenues; the $400,000 in 1984 was 
1.4%. The Accounts Receivable 
Write-off Policy was approved by the 
Port Commission and has been in effect 
since July 1984. Of the 63.2% 
receivables 90 days past due, accounts 
representing 47.5% have been forwarded 
to the City Attorney and are in 
litigation. Only 15% are the 
responsibility of the collections 
section. 



-4- 



The Issue of Collections Policy 



The report reconmends that the Port develop and install new collection 
procedures, and that these procedures should cite legal authority for 
taking actions. The report further reconmends that the Port should amend 
the write-off policy to include downward adjustments of accounts. 

The Port has adopted and follows an aggressive, well documented, 
comprehensive collection policy which includes strict legal guidelines. 
A copy of the collection policy was provided to the audit team. The City 
Attorney has reviewed the collection policy and has approved it. In 
fact, the Budget Analyst is the only party to believe additional citing 
of authority is necessary, although the Budget Analyst admits that this 
would likely not result in increased collections. 

The "downward adjustments", quoted above, refers to credits to accounts 
receivable for billing adjustments, which are made to correct billing 
errors. These have nothing to do with bad debt write-offs, and we see no 
reason to include it in either the collection or write-off policies. 

$40,000 in revenues could be saved by increasing tenant deposits. 
However, this can be accomplished without revising Port collection 
practices. The Budget Analyst offers no suggestions to improve 
collection policies or procedures that will result in increased revenues. 

The report recommends the Port develop a comprehensive procedures manual 
which addresses all such collection issues and details the circumstances 
and authority under which any actions can be taken. A collection policy 
and a collection procedure have already been developed and are in place 
and working well. These policies, along with the write-off policy, 
specifically identify the steps in the collection process, the timing of 
these steps, and responsibilities by staff position. The policies also 
list levels of authority by staff position to recommend settlements and 
write-offs of accounts, which then must be approved by the Port 
Commission and the Controller's Office. 

The report recommends that we develop a program — in conjunction with 
the Wharfinger's Department — to improve the collection of facility 
damage claims in order to determine the proper amount due to the Port. 
The Port has a Facility Damage procedure, prepared in October 1984, which 
addresses this issue and is working well. 



-5- 



I 



AUDIT STATEMENT 

SECTION II. 1: CAPITAL PROJECT PLANNING 

"THE PORT IS COMMITTING MILLIONS OF 
DOLLARS IN BOND FUNDS AND OTHER FUNDS 
TO MODERNIZE CARGO HANDLING FACILITIES 
IN THE HOPES OF CAPTURING MORE 
CONTAINER SHIPPING BUSINESS. THE PORT 
HAS ORDERED TWO NEW CRANES AND IS 
ACQUIRING ONE USED CRANE AT A COST OF 
$6.9 MILLION. ADDITIONALLY, THE PORT 
PROPOSES TO REBUILD AN EXISTING CRANE 
AT A COST OF $1 MILLION EVEN THOUGH 
THE USE OF THE PORT'S EXISTING CRANES 
IS FAR BELOW THE INDUSTRY AVERAGE. IN 
FACT, TO INCREASE THE PORT'S PRESENT 
CRANE USAGE TO THE INDUSTRY AVERAGE, 
THE PORT WOULD HAVE TO INCREASE THE 
ANNUAL NUMBER OF CONTAINERS MOVED BY 
227 PERCENT FROM AN AVERAGE OF 15,303 
TO AN AVERAGE OF 50,000 FOR EACH OF 
ITS SEVEN EXISTING CRANES WHICH ARE 
NOW USED LESS THAN FIVE PERCENT OF 
THEIR AVAILABLE TIME. CLEARLY, BY 
ADDING THREE CRANES FOR A TOTAL OF 10 
CRANES, THE PORT'S CONTAINER HANDLING 
CAPACITY WILL FAR EXCEED ANY CARGO 
PROJECTIONS WELL INTO THE FUTURE. 
THEREFORE, THE PORT SHOULD DEFER THE 
PROPOSED $1 MILLION REBUILDING OF AN 
EXISTING CRANE AND DEFER AN ADDITIONAL 
ESTIMATED $4 MILLION FOR OTHER CARGO 
HANDLING IMPROVEMENTS. THIS TOTAL OF 
$5 MILLION SHOULD BE PRODUCTIVELY USED 
FOR THE DEVELOPMENT OF SEVERAL 
COMMERCIAL REVENUE PRODUCING CAPITAL 
PROJECTS ON PORT PROPERTY." 



PORT'S RESPONSE 

This recommendation is a poorly 
supported attempt to divert funds from 
container terminal modernization to 
non-maritime maintenance and repair 
projects with no income producing 
potential. The Port has a very 
specific plan for its capital projects 
which is periodically updated to 
reflect current requirements. The 
$1 million for the upgrading of one 
container crane has never been 
scheduled for implementation and is, 
in effect, deferred. $4.0 million, 
which apparently related to an 
outdated estimate to modify two 
railroad tunnels, was reprogrammed 
over 12 months ago to another high 
priority project - realignment of rail 
track to improve terminal access. Any 
arbitrary unspecified reprogramming of 
bond funds to non-maritime projects 
would jeopardize currently planned and 
scheduled container terminal and ICTF 
construction plans and therefore would 
be extremely detrimental to the Port. 



Port's Detailed Response : 

The Issue of Maritime Development 

The Port of San Francisco is in a "catch up" mode with respect to building 
the facilities that are needed for the Port to be a competitive player in 
the container marketplace. However, as the Report points out, San 
Francisco has rail access equal to or better than other Bay Area ports, 
and has natural deep water channels. Construction of the Intermodal 
Container Transfer Facility (ICTF) gives one additional cost advantage to 
shippers using San Francisco. With these assets, the Burton Act mandate, 
and the voters' approval of the bonds to finance needed improvements, it 
would be irresponsible for the Port to do anything but modernize its 
terminals. 
\ 

Modem vessels are becoming larger and larger, with deeper draughts and 
more containers. Additional cranes are required because container vessels 
are getting larger and it is the "surge" nature of the loading/unloading 
of thousands of containers in eight hours that requires crane capacity. 



-6- 



Ships do not make money while sitting in Port. Shippers do not want to 
call where there is poor turn-around time. In the Port's marketing, it is 
impossible to attract new lines on the basis of future promises of what 
will be built. The report says the present cranes are idle most of the 
time; but so are most of the City's fire trucks. This is an illogical 
argument. Playing statistical games is no substitute for understanding 
maritime marketing and competition. The Southern Waterfront Master Plan, 
adopted by the Port Commission in 1981, and incorporated into the BCDC/MTC 
Seaport Plan, is the blueprint for development currently underway. The 
Port's analysis included cargo and throughput projections, criteria and 
schedule for improvements. The Port has completed a comprehensive 
Environmental Impact Report ("Master EIR") for all the anticipated 
development options for the North and South Container terminals. 

The Issue of a Capital Development Plan 

The maritime capital development plan is a hierarchical set of plans, 
proceeding from the regional (Seaport Plan) level to the specific 
implementation plans (engineering and working drawings) that are developed 
for each project. The Report implies that maritime improvements are ad 
hoc decisions and that no thought is given to long-term planning. This is 
entirely untrue. Long-range planning is a function integrated among the 
various Departments and includes outside consulting expertise in areas of 
marketing, engineering and construction. The Southern Waterfront Master 
Plan contains cargo projections, criteria and timetable for provision of 
facilities. In 1981, the Port began planning the full build-out of the 
intermodal rail yard and other improvements now being completed. 

The Issue of the ICTF 

The Report endorses the development of the Intermodal Container Freight 
Station (ICTF) but implies that the ICTF will not function efficiently 
without tunnel modifications to permit double-stack rail cars. The 
interim ICTF is being used today, and the full build-out ICTF will 
function perfectly well without the tunnel modifications. Obviously, 
double stack capability will enhance the attractiveness of the ICTF, and 
that is why the Port is pursuing tunnel improvements. The Report 
contradicts itself in stating that the tunnel improvements are needed but 
that the expenditure should be deferred. 

The Issue of Redirecting Bond Funds 

The Report recommends that the spending of $1 million to upgrade an 
existing container crane and $4 million for railroad tunnel modifications 
be deferred. We have already programmed these funds to other 
revenue-generating maritime capital projects associated with the overall 
container terminal modernization and construction of the ICTF. The 
maritime improvements needed at this time far outstrip the funding 
available. The Report's recommendation to make an arbitrary reduction 
from our current plan is not a reasonable approach and raises questions 
about the usefulness of the Report as a management tool. The projects 
that are suggested to be funded with these "reprogrammed" funds are 
primarily for maintenance and repair, without any new revenue potential. 



-7- 



AUDIT STATEMENT 

SECTION II. 2: AUDITS OF SHIPPING 
LINES AND TERMINAL OPERATORS 

"ALTHOUGH THE PORT WHARFINGERS CONDUCT 
AUDITS TO VERIFY WHARFAGE STATEMENTS, 
THEY DO NOT REVIEW EITHER THE PORT'S 
BILLINGS AND LEASE AGREEMENTS OR THE 
SHIPPING LINES* AND TERMINAL 
OPERATORS' PAYMENT AND RELATED 
ACCOUNTING RECORDS. AS A RESULT, THE 
PORT HAS INSUFFICIENT DATA TO 
DETERMINE WHETHER IT IS RECEIVING THE 
CORRECT AMOUNT OF REVENUES WHICH IT IS 
OWED FROM THE SHIPPING LINES AND 
TERMINAL OPERATORS." 



PORT'S RESPONSE 

This is incorrect. A more thorough 
analysis of the Port's billing and 
audit practices would have shown that 
the Port is in fact able to determine 
and trace the accuracy of what is 
owed. The recommendation reflects a 
lack of understanding of the structure 
of the Port's agreements, since they 
are unlike those of the Port of 
Oakland. Oakland has a complicated 
"use agreement" formula in which the 
previously agreed-upon discount varies 
depending upon actual cargo volume. 
The Port of San Francisco regularly 
audits the ship's cargo manifest, 
which is the basis for the fees to be 
paid. All revenues, including 
maritime, are a part of the Port's 
annual audit by an independent CPA 
firm. The Report elected to look at 
the Port of Oakland's audits in a year 
(1982) that showed a very large 
discrepancy. To suggest that a 
similar revenue gain would be found 
for the Port of San Francisco is a 
classic "apples and oranges" 
comparison. 



Port's Detailed Response; 
The Issue of Audits 

The Report provides no evidence of any problems with the current audits of 
shipping line revenues. Rather than relying upon a thorough analysis of 
the Port of San Francisco and the Port of Oakland procedures for reviewing 
wharfage statements, billings, collection procedures and annual audits, it 
merely makes a hypothetical revenue comparison with the Port of Oakland, 
which has different procedures and different types of shipping line 
agreements . 

Any audit to determine if the Port "...is receiving the correct amount of 
revenues which it is owed from the shipping lines and terminal operators" 
must start with the same source documents, i.e. the cargo manifests. The 
Port regularly audits the cargo manifests of its shipping lines to 
determine the accuracy of the wharfage statements and billings. The 
results of these audits have shown both additional billings and refunds. 

Once the wharfage statement is submitted to the Port, the Wharfinger 
checks the calculations of each wharfage statement and makes any other 
correction that appears necessary before a bill is generated by the 
Accounting Division. This procedure greatly reduces any mathematical 
errors or misapplication of the tariff which is the source of almost all 
6€ the "additional revenue". The Accounting Department routinely follows 
up on the collection of maritime bills, and in those cases where normal 



-8- 



I 



collection procedures are not totally effective, the Maritime Department 
will follow up directly with the shipping lines. If the Maritime 
Department efforts do not work, the collection is turned over to the City 
Attorneys Office. 

As part of the Port's regular annual audit by an independent CPA firm, all 
Port revenues. ineludinR maritime , are audited to verify that revenues are 
being properly reported and recorded. The results of the Port's annual 
audit are submitted to the City Controller. 



AUDIT STATEMENT 

SECTION III.l: DURATION OF LEASES 
VERSUS LICENSES 

"IN LIEU OF AWARDING LEASES, WHICH IN 
SOME INSTANCES REQUIRE THE USE OF 
COMPETITIVE BIDDING UNDER THE PORT'S 
PROCEDURES, THE PORT HAS CHOSEN TO 
AWARD 415 LICENSES TO CERTAIN 
TENANTS. WHILE THESE LICENSES CAN BE 
TERMINATED BY EITHER THE PORT OR THE 
TENANT UPON 30 DAYS WRITTEN NOTICE, IN 
FACT THE PORT HAS PERMITTED NUMEROUS 
LICENSES TO REMAIN IN EFFECT FOR 
YEARS. THESE LICENSES ARE PRESUMED TO 
HAVE BEEN RENEWED EVERY 30 DAYS IF 
NEITHER THE PORT NOT ITS TENANTS TAKE 
ANY ACTION TO TERMINATE THE LICENSES. 
SINCE THESE LICENSES, IN CONTRAST TO 
LEASES, ARE AWARDED BY THE PORT 
WITHOUT UTILIZING ANY COMPETITIVE 
BIDDING PROCEDURES, THE PORT CANNOT BE 
ASSURED THAT IT HAS MAXIMIZED ITS 
REVENUES FROM THESE TENANTS." 



PORT'S RESPONSE 

Seventy-five percent of the licenses 
are for office space which is rented 
for the maximum the market will 
support. Most of the office uses are 
in the Ferry Building. Under the 
recently terminated agreement with a 
prospective developer of the Ferry 
Bldg., the Port was prohibited from 
offering leases pending development of 
the building. Now the Port is 
negotiating leases for office space in 
these areas. Licenses have been used 
to allow the Port to derive revenue 
from sites and uses that would not be 
able to get the permits or regulatory 
approvals for permanent status. In 
some cases, licenses are the choice of 
tenants. Licenses are for uses such 
as valet parking, shoeshine and flower 
stands, and sidewalk vendors. 



Use of license agreements allows the Port to derive revenues from parcels 
that would otherwise be subject to lengthy environmental and permitting 
requirements. Until very recently when an agreement was reached, after 
sustained efforts by the current Port leadership, BCDC would not give 
permits for change of use or long-term tenancies to non-maritime users in 
maritime and Port Priority zones. Even with buy-out provisions, BCDC is 
reluctant to have the Port encumber maritime reserve areas with commercial 
tenants. Licenses are also used so that the Port can readily recapture 
property for planned future uses. For example, licenses have been used 
for restaurants that have storage or garbage areas on Pier 45 at 
Fisherman's Wharf because the pier is out to bid for hotel development. 



-9- 



AUDIT STATEMENT 

SECTION III. 2 COMPLIANCE WITH LEASES 
AND LICENSES 

"AS A RESULT OF INCOMPLETE DATA 
CONTAINED IN THE PORT'S 117 LEASE AND 
415 LICENSE FILES, THE PORT DOES NOT 
KNOW IF ITS TENANTS ARE IN FULL 
COMPLIANCE WITH ALL OF THE PROVISIONS 
OF THESE LEASES AND LICENSES. FOR 
EXAMPLE, IN THE PAST YEAR, THIRTY 
ADJUSTMENTS TO INCREASE RENT, WHICH 
WERE PROVIDED FOR UNDER THE LEASE AND 
LICENSE AGREEMENTS, WERE NOT MADE ON A 
TIMELY BASIS." 



PORT'S RESPONSE 

All Port leases have been reviewed and 
updated as the Report states. All of 
the licenses will be reviewed for 
compliance in 1985/86. One of the 
Port's goals in its "Management By 
Objectives" (MBO) program for the 
current year is completion of 
compliance review of all its 
agreements. Any needed adjustments 
are now being made on a timely basis 
as a result of this effort. 



AUDIT STATEMENT 

SECTION III. 3: LEASE ADJUSTMENTS FOR 
RESTAURANT TENANTS 

"UNDER THE EXISTING PROVISIONS OF THE 
PORT'S LEASES WITH SOME OF ITS 
RESTAURANT TENANTS, THE PORT IS 
ENTITLED TO ADJUST THESE TENANT RENTS 
BASED ON AMENDING THE PERCENTAGE OF 
GROSS RECEIPTS EVERY FIVE YEARS. 
HOWEVER, THE PORT HAS NOT ADJUSTED 
THESE LEASES FOR EITHER OF THE 
FIVE-YEAR PERIODS BEGINNING IN 1980 
AND IN 1985. BY FAILING TO ADJUST 
TENANT RENTS IN 1985 AND IN 1980, THE 
PORT HAS LOST ESTIMATED REVENUES FROM 
THEIR RESTAURANT TENANTS OF AT LEAST 
$675,000 FROM THEIR RESTAURANT 
TENANTS. INCREASING RENTS TO ITS 
RESTAURANTS TENANTS, IN ACCORDANCE 
WITH THE PORT'S LEASE PROVISIONS, 
WOULD RESULT IN ESTIMATED INCREASED 
REVENUES TO THE PORT OF AT LEAST 
$380,000 ANNUALLY." 



-10 



PORT'S RESPONSE 

The Report is again misleading in that 
not all of the 1975 restaurant leases 
allowed rental adjustments in 1980. 
The Report implies it is the Port's 
right to bring these leases up to the 
Port's "current rate" for new 
restaurants. In fact, each lease is 
different, and any adjustment is 
subject to the lease terms which 
define the geographic boundary of the 
survey area for the purpose of 
determining comparable rents , etc . By 
use of ambiguous terms and a reference 
to Fisherman's Wharf, the Report 
implies widespread delay in increasing 
restaurant rents at Fisherman's 
Wharf. Actually, only four 
restaurants in the Wharf area are at 
issue. The Report calculates "lost" 
revenue by using percentage rent 
standards that are the highest of any 
being charged. There is no evidence 
to document lost revenues, since a 
percentage rent survey may well 
indicate that no adjustment or a 
downward adjustment is appropriate. 
As the Report states , the Port has 
time to conduct a survey, adjust rents 
and collect any monies which may be 
due. This is a staff priority, and an 
automated "tickler" system will be 
used in the future. References to 
decisions reached by the Port 
Commission in 1980 are not relevant. 
These decisions were made by 
responsible parties after due 
deliberation on facts which showed no 
adjustment was justified at that time. 



I 



I 



AUDIT STATEMENT 

SECTION III. 4: LEASING OF PORT 
FACILITIES 

"THE COMMERCIAL PROPERTY DEPARTMENT 
HAS NOT AGGRESSIVELY ATTEMPTED TO 
LEASE THE PORT'S COMMERCIAL, 
INDUSTRIAL AND OTHER SPACE. IN 
CONTRAST TO A CITYWIDE VACANCY RATE OF 
APPROXIMATELY 13.4 PERCENT FOR OFFICE 
SPACE, THE PORT'S VACANCY RATE FOR 
OFFICE SPACE MANAGED BY PORT STAFF, IN 
CONTRAST TO THE PORT'S OFFICE SPACE 
MANAGED BY OUTSIDE DEVELOPERS, IS AN 
ESTIMATED 23.6 PERCENT. AS A RESULT 
OF VERY LIMITED MARKETING ATTEMPTS TO 
LEASE PORT FACILITIES, WE ESTIMATE 
THAT THE PORT HAS LOST AT LEAST 
$298,800 IN LEASE REVENUES DURING THE 
PAST YEAR FOR JUST TWO OFFICE 
BUILDINGS. BY DEVELOPING A SOUND 
MARKETING PLAN, WE ESTIMATE THAT THE 
PORT COULD INCREASE ITS PROPERTY 
RENTAL INCOME BY AT LEAST $375,828 
ANNUALLY." 



Port's Detailed Response; 

The Issue of Office Occupancy 



PORT'S RESPONSE 

The vacancy rate the Port has 
documented is approximately the same 
as the Citywide average (15%) . The 
Report exaggerates the amount of 
vacant office space and the vacancy 
rate by a selective inventory and by 
eccentric standards that are illogical 
and contrary to norms in the real 
estate industry. The Report's 
inventory of Port-controlled office 
space does not include office space 
when it is occupied in conjunction 
with or adjacent to maritime 
operations such as ship repair, 
import-export or shipping lines — 
even though, when such space is 
vacant, it is marketed by the 
Commercial Property Department for 
office tenants. The audit team did 
not count Crowley Maritime 's occupied 
office space at Pier 9, but did count 
similar vacant office space in Pier 
35. The Report did not count 32,000 
sq.ft. of Port offices in the Ferry 
Building even though the Port vacated 
space on the first and second floors 
and is now renting to other tenants. 
The result is that the Report 
magnifies the vacancy rate by 
comparing it to a smaller total than 
actually exists. 



The Port has twenty-four facilities which contain rentable office space 
under the Port's day-to-day control (i.e. this excludes office buildings 
operated by others on Port land such as Blue Shield or Roundhouse) . The 
total leasable office space in these facilities is 404,131 sq.ft. The 
total occupied is 344,452 sq.ft., and the total vacant is 59,679. Thus, 
occupancy is 85% and the vacancy rate is 15% (documentation on file at the 
Port) . 

The S.F. Examiner (4/18/86) stated that as of April 1, 1986, the vacancy 
rate for the Financial District was 15.1%, with South of Market financial 
district at 22.7% and the Van Ness corridor at 23%. Therefore, the 
Report's conclusion that the Port would receive increased revenues by a 
reduction of its vacancy rate from the citywide average is meaningless. 
Further, considering the drop in rents for prime office space with 
superior location and amenities (from $28+ to low $20 's per sq.ft. 
according to the Examiner article noted above) the Port has achieved and 
maintained exceptionally high office occupancy. 



-11- 



The Report's recontmendation that the Port "market" office space does not 
comport with the contradictory recommendation to put it out to bid. In 
today's marketplace, competitive bidding is a pointless and excessively 
time-consuming exercise. 

The Issue of Area Available for Development 

This section of the Report states that the Port has 908,109 sq. ft. of 
vacant sites and buildings that could be developed for light industrial or 
similar uses. Yet this total number includes the 434,000 sq. ft. referred 
to in Section I. After exclusion of the 300,300 sq.ft. under environmental 
review for a maritime warehouse center, exclusion of other buildings that 
can not be rented, and exclusion of 289,136 sq.ft. under the control of 
the Redevelopment Agency under a long-term lease, the accurate total is 
about 146,729 sq.ft. 

The Report attempts to perpetuate the myth that the Port has many 
development sites that are lying fallow due to inept management. The 
"value" of land obviously depends on what development or uses are 
allowed. For example, the waterfront Promenade represents 1,600 feet of 
Bay front land. It is dedicated to open space under the City's Northeast 
Waterfront Plan, the BCDC Special Area Plan, and the Board's adopted South 
Beach / Rincon Point Redevelopment Plan. What is its "value"? 



The Issue of How Port Pursues Commercial Property Development 

The Port uses the financing provided by developers under long-term leases 
to accomplish development of surplus property. The leases provide that 
the Port participates in the profits from these developments receiving a 
minimum rent plus "percentage rents" based on the profitability of the 
development. This has been standard practice for many years. 

Many parcels have been or are being developed on this basis, including 
seawall lots (inland of the Embarcadero) that contain developments such as 
the Blue Shield building, Francisco Terraces, Roundhouse Plaza, 900 Front 
St, Fog City Diner, etc. Others, such as at Fisherman's Wharf and 
Pier 39, have been developed on pier coverage. Most commercial property 
leases require the tenants to maintain the substructure and site in good 
condition. Maintenance is not the Port's responsibility, and the lease 
return reflects this arrangement. 

A team of Port staff, including the finance director, property manager, 
planning and legal staff, and outside consultants, follow a policy of 
offering property for major development in a planned sequence. A schedule 
for these offerings has been developed under the leadership of the current 
Executive Director. 

The first offering was Seawall Lot 318, leased as an adjunct to the 
rehabilitation of the Magnin building. The second was Piers 1-1/2, 3 and 
5, including the refurbishment of three historic bulkhead buildings and a 
new office building with almost 80,000 sq. ft. of public plazas. The 
current offering is the Pier 45 Hotel and Hyde St. Pier commercial fishing 
complex, now published and distributed as a Request for Qualifications. 
The next offering will be Seawall Lot 314 (Bay at the Embarcadero), 
Following this will be Pier 24. The preparation and subsequent 
negotiation of these offerings are proceeding in a timely fashion. 



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The Issue of Land Use Restrictions 



Many of the sites that the Report refers to as unused or underutilized are 
designated by BCDC for Port Priority, Maritime and Seaport development. 
Port property can not be developed for the traditional "highest and best" 
use. The obstacles are primarily the land use restrictions imposed by the 
State Lands Commission, BCDC, City zoning and master plan, etc. As a 
consequence of numerous court cases and interpretations, these lands can 
not be developed for residential or general office space. 

Since land use restrictions are "invisible" controls on what can be done 
with Port property, it is easy to disregard their importance in governing 
what can be built, and, in turn, the profitability of the potential 
development. The Port is the trustee of these lands for the State of 
California. The public trust doctrine, embodied in the State's 
constitution, requires that Port lands be used for purposes of statewide 
importance and not for purely private purposes. 

The State Lands Commission has made it very clear to the Port that it is 
not permissible to develop "general" office space unrelated to the conduct 
of water-borne commerce or purposes of statewide importance (see People vs 
California Fish Company and City of Berkeley vs Superior Court) . The SLC 
requires that the Port and potential developer submit criteria for 
"qualified" tenants prior to beginning a project, and that they 
demonstrate a demand by such qualified tenants for 150% of the space to be 
built. 

The Issue of the Property Department as a "Passive Money Collector " 

The Report states that the Commercial Property Department is currently 
like a passive money collector with staff that is there merely for the 
maintenance of accounts. This is completely false. Over a two-year 
period (April 1984-March 1986) the Commercial Property Department has: 



Negotiated and Processed 266 new rental agreements. 

Booked and Coordinated 37 special events at Piers 35 and 45. 

Issued and Monitored 42 filming permits. 

Increased annual billings by more than $750,000 through lease 

rental rate adjustments (CPI's and others). 
Increased annual billings on existing licenses by more than 

$635,000 through scheduled rate adjustments. 
Increased rates for parking stalls by 15 to 35%. 
Developed and commenced implementation of a plan for 

installation of 300 new parking meters. 
Assisted in collection of several hundred thousands dollars 

in delinquent accounts. 
Audited 117 leases and corrected compliance deficiencies 

discovered thereby, resulting in collecting over $175,000 in 

back payments of rent. 
Corrected many squatter/encroachment problems by evicting 

illegal users or securing payment for the space (including 

pproximately $70,000 in back payments). 
Secured several facilities which had a history of 

squatter/vagrant problems, including Piers 1, 1-12, 3, 5, 

7, 33, 66 and several southern waterfront seawall lots. 



Continued, next page 



-13- 



Commercial Property Department's Accomplishments, continued 

Developed or formalized policies and/or procedures for: 
. Space rental (licensing & leasing) 
. Termination of tenancies 
. Special events rentals or Piers 35 and 45 
. Approval of tenant signs 
. Tenant insurance requirements 

. Checklist for monitoring performance of contract janitors 

and security guards. 
. Work orders 

. Monthly Rental report through which billing errors are 
discovred and corrected. 
Worked with other City departments to establish policies and 

procedures to deal with problems such as pedicabs, street 

performers, street vendors, squatters, vagrants. 
Designed and commenced implementation of computerized 

vacancy reports, tickler systems and lease abstracts. 
Contributed significantly to development of Redevelopment 

Agency Lease/Option, Piers 1-1/2, 3 and 5 Lease/Option and 

developer selection, and Pier 45 RFQ/RFP. 



RECOMMENDATIONS ALREADY IN PROGRESS AT THE TIME OF THE REPORT 

Many Report recommendations are for actions or improvements that have been 
under way for some time. These include: 

a) Development of a new collections policy (completed); 

b) Conversion of electric service to PG&E (on-going since 1972); 

c) Extensive use of monthly management financial reports; 

d) Compliance review of all tenant leases; 

e) Development of an automated facility cost/revenue program; 

f ) Reorganization of MIS Department resulting in a 100% increase in 
productive output and elimination of outside consultants; 

g) Completion of procedures manuals for purchasing and personnel; 
development of manuals for leasing and payroll; 

h) Use of "tickler" files for lease compliance/ adjustments; 

i) Auditing of shipping contracts through manifests; and 

j) Use of short-term leases rather than licenses for non- con forming uses 
in maritime reserve areas. 



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RECOMMENDATIONS WITH WHICH WE CONCUR 



The report contains many useful recommendations. We concur with the 
recommendations in the following areas: 

a) China Basin Houseboat Community; 

b) Fireboat; and, 

c) Provision of Electricity. 

Conversion of electrical service to PG&E has been Port policy and an 
on-going effort since the early 1970* s. Staff has met with the Mission 
Creek Harbor Association and is in the process of finalizing lease terms 
for Port Commission approval. At Port staff's urging, the Harbor 
Association has been made a co-applicant on the Bay Conservation and 
Development Commission permit for the project. This places compliance 
responsibility on the Association. 



-15- 



PORT LAND LABELED "UNUSED OR UNDERUTILIZED" IN THE AUDIT STATEMENT 



Actual Land Use Disposition and Availability for Development 



Facility Location (between) 

Pier 98 South end of Cargo Way 

and India Basin 



Pier 96 Cargo Way and Bay at 

Jennings Street 



SWL 352 Cargo Way and Pier 94 

and Islais Creek 



SWL 344 Cargo Way and Piers 90/92 



PORT'S RESPONSE 

Spit of land created for proposed 
"Southern Crossing" bridge. Considered 
illegal fill by BCDC; BCDC could require 
its removal at great cost. Instead Port 
proposed 4 acres for maritime/ terminal 
and 11 acres for public access/habitat 
as part of "mitigation" required for 
tenninal expansion permit. BCDC OK'ed. 

Admittedly a vacant office building 
within the terminal. All of the area 
referred to is part of terminal dev- 
elopment area. 100-foot strip would 
not be developable even if it was 
available, due to set-back, off-street 
parking and loading requirements. 
This is a totally unrealistic site 
for development unrelated to terminal. 
All this area is designated under BCDC 
Plan as "Port Priority" only. 

Site is not available for "mixed use" 
development; site is a BCDC-designated 
Seaport site and Port Priority area. 
Adopted master plan and EIR call for 
container terminal expansion here. 
BCDC permit could not be obtained for 
non-maritime use. "Natural" state is 
Bay waters. 

See above. Development recommendations 
totally ignore BCDC limitations on use. 
Area is designated Port Priority. 
Current uses are in support of 
maritime activities. 



Islais Crk Marin and Islais Streets 
SWL 354 
Piers 84, 
86, 88 



Islais Street is waterway and a 
street on paper only. Area does need 
cleanup. Port holds a BCDC permit 
to use south side of channel for 
rail trestle alignment to access 
Piers 94-96 and ICTF. In the Bay 
Plan this area is designated for 
public access and does not have 
development potential. Again, 
verify with BCDC at 557-3686. 



-16- 



Facility Location (between) 



PORT'S RESPONSE 



Pier 80 Marin, Army and Twenty- 

sixth Streets & Illinois, 
Michigan, Maryland and 
Massachusetts Streets. 



This is not Port property; it is 
WP/UP (Upland) railyard. The Pier 
80 building does have some space 
for lease. 

Perception that this is Port land 
should be corrected in report. 



SWL 349 Twentieth and Twenty- 

second Streets and Pier 
and Port's shipyard 
facility used by Todd, 



Pier 70 Container Freight Station 
70 (CFS) and warehousing center are 
under environmental review. The 
bulk of the site is a BCDC- 
designated "Near Term" Seaport 
site. Call BCDC (557-3686) and 
inquire about the "mixed use" 
development potential. We did. 



SWL 345 Illinois, Mariposa and 

Piers 64 China Basin Streets 
and 54 extending to Pier 50 

SWL 343 Illinois and China Basin 

Streets near Mariposa 
Street 



Disagree unused and underutilized; 
small boat repair uses in demand. 



Property leased to production and 
sales uses, in addition to parking. 



China 
Basin 



Channel and Berry Streets 



SWL 336 
Pier 46B 



Berry, Third Streets and 
China Basin 



Port-owned sixty-foot strip has 
little, if any, development 
potential. Mission Bay project 
is being planned for 200 acres 
of surrounding private land. 
In all alternatives, channel is 
dug out and greatly enlarged thus 
eliminating any "land" areas 
that now exist. This is being 
done at the insistence of the 
"public" through the City Planning 
Department's process. 

Building houses Port Maintenance 
Department, Belt Line storage and 
industrial users. Cost to relocate 
Maintenance Dept. is under study. 



SWL 335 Embarcadero and: 

SWL 334 Berry Street 

SWL 333 Berry, Second and King 

SWL 332 Towns end 

SWL 331 First and Brannan 

Pier 40 Fremont and Brannan 
. King Street 



South Beach project of the Redev- 
elopment Agency. The Port has not 
had control over land uses here 
since the Board of Supervisors 
designated it a Redevelopment 
Area. This was a Board, not a Port, 
decision. Redevelopment Agency 
has funding sources, such as CBDG 
and tax increment financing, that 
are not available to Port. 



-17- 



Facility 



Location (between) 



PORT'S RESPONSE 



SWL 330 Embarcadero and: 

SWL329 Beale and Bryant 

Main and Bryant 



Pier 34 Brannan Street 



Pier 30/32 Brannan and Bryant Streets 



Scheduled for future development. 
Staff has received and is con- 
sidering two development proposals 
that involve an international 
trade fair/exhibit. City is trying 
to limit development potential by 
reducing height limit from 105 ft. 
to 40 ft. 

If rebuilt, under BCDC regulations 
would have to be "water dependent" 
use with proof of "no alternative 
upland location". 

Being rebuilt for container freight 
station (CFS), cold storage and 
centralized customs. Has undergone 
environmental review; BCDC permit 
filed in March. Design contract 
awarded by Port Commission. Con- 
struction to begin late 1986 or 
early 1987. 



Pier 24 



Harrison Street 



Designated for mixed use, community- 
oriented retail, recreation and 
public access/assembly in BCDC and 
City's master plan. However, 
structure would have to be rebuilt, 
and on rebuilt structure BCDC would 
not allow the planned uses. 



SWL 328 



Bryant and Harrison 



SWL 328 is on a long-term lease to 
owners /developers of adjacent 
building (Magnin Bldg.) which is 
not on Port property. Port has re- 
capture rights. 



SWL 327 
SWL 348 
SWL 34 7S 
SWL 34 7N 



Steuart and: 
Folsom 

Folsom and Howard 

Howard 

Howard 



327 and 348 to be used as a park by 
the Redevelopment Agency. SWL 34 7N 
is under license to developers of 
adjacent parcel where they have 
built a public plaza and placed 
a sculpture and fountain. SWL 347S 
is leased to State for parking. 



Agriculture 
and Ferry 
Buildings 



Mission and Market Streets 



Buildings are occupied by long 
term tenants (World Trade Club; 
Limbach, Limbach & Sutton), Port 
offices and by numerous offices. 
Port agreement with Continental 
Development Corp. for rehab of 
buildings did not allow Port to 
enter into leases. 



-18-